If the Federal Reserve starts cutting interest rates, which will outperform: bitcoin, gold, or U.S. stocks?

Written by | David, Deep Tide TechFlow

Original Title｜Reviewing the Fed's Rate Cut Cycle: Where Will Bitcoin, the Stock Market, and Gold Go?

"Take a break and wait for the Fed's decision before making a move." In recent days, a wait-and-see sentiment has been prevalent in investment communities.

At 2 a.m. on September 18, East 8th District time, the Fed will announce its latest interest rate decision. Since the rate cut last September, this will be the fifth FOMC meeting. The market expects another 25 basis point cut, from the current 4.5% down to 4.25%.

A year ago at this time, everyone was waiting for the start of the rate cut cycle. Now, we are already halfway through it.

Why is everyone waiting for this shoe to drop? Because history tells us that once the Fed enters a rate-cutting channel, various assets often experience a takeoff rally.

So, with this rate cut, where will bitcoin go? How will the stock market and gold perform?

By reviewing the Fed's rate cut cycles over the past 30 years, perhaps we can find answers in historical data.

What Kind of Rate Cut Cycle Are We Standing At the Beginning Of?

Historically, a Fed rate cut has never been a simple move.

Sometimes, a rate cut is a shot in the arm for the economy, and the market soars in response; but sometimes, a rate cut is the prelude to a storm, signaling a bigger crisis ahead, and asset prices may not rise accordingly.

1995: Preventive Rate Cut.

At that time, Fed Chairman Greenspan faced a "happy dilemma": economic growth was steady, but there were signs of overheating. So he chose a "preventive rate cut," lowering rates from 6% to 5.25%, a total cut of only 75 basis points.

The result? The US stock market kicked off the most glorious five-year bull market of the Internet era, with the Nasdaq index rising fivefold over the next five years. A textbook example of a soft landing.

2007: Bailout Rate Cut.

As depicted in the movie "The Big Short," the subprime crisis was already brewing, but few realized the scale of the coming storm. In September of that year, when the Fed began cutting rates from 5.25%, the market was still celebrating, and the S&P 500 had just hit a record high.

But the subsequent script is well known: Lehman Brothers collapsed, a global financial tsunami ensued, and the Fed had to cut rates from 5.25% to 0.25% within 15 months—a 500 basis point drop. This rescue came too late and failed to prevent the worst recession since the Great Depression.

2020: Panic Rate Cut.

No one could have predicted the "black swan" of COVID-19. On March 3 and March 15, the Fed made two emergency rate cuts, dropping from 1.75% to 0.25% in just 10 days. At the same time, it launched "unlimited quantitative easing," expanding its balance sheet from $4 trillion to $9 trillion.

This unprecedented liquidity injection created one of the most surreal moments in financial history: the real economy was shut down, but financial assets were partying. Bitcoin soared from $3,800 in March 2020 to $69,000 in November 2021, a gain of over 17 times.

Looking back at these three rate cut models, you can see three similar results but different asset movement processes:

• Preventive rate cut: small cut, soft landing, assets rise steadily

• Bailout rate cut: large cut, hard landing, assets fall first then rise

• Panic rate cut: emergency cut, extreme volatility, assets V-shaped reversal

So in 2025, which script are we at the beginning of?

From the data, it now looks more like the preventive rate cut of 1995. The unemployment rate is 4.1%, not high; GDP is still growing, no recession; inflation has fallen from the 9% peak in 2022 to around 3%.

But there are also a few unsettling details worth noting:

First, this time the rate cut comes when the stock market is already at historical highs, with the S&P 500 up more than 20% this year.

Historically, in 1995 the rate cut came just as the market was recovering from a low; in 2007, the cut came at a high, and the market crashed soon after. Second, the US government debt-to-GDP ratio has reached 123%, far higher than the 64% in 2007, limiting the government's fiscal stimulus capacity.

But regardless of the rate cut model, one thing is certain: the liquidity gates are about to open.

The Rate Cut Script for the Crypto Market

This time, when the Fed turns on the liquidity tap again, what will happen to the crypto market?

To answer this, we first need to understand what the crypto market experienced during the last rate cut cycle.

From 2019 to 2020, when a market with only $200 billion in capitalization suddenly welcomed trillions in liquidity, the asset appreciation process was not instantaneous.

• 2019 Rate Cut Cycle: Much Thunder, Little Rain

On July 31 that year, the Fed cut rates for the first time in a decade. For the crypto market at the time, this should have been a major positive.

Interestingly, bitcoin seemed to have gotten the news in advance. At the end of June, bitcoin started rising from $9,000, reaching $13,000 by mid-July. The market was betting that the rate cut would bring a new bull run.

But when the rate cut actually came, the price action was surprising. On July 31, the day of the cut, bitcoin fluctuated around $12,000, then fell instead of rising. In August, it broke below $10,000, and by December had fallen back to around $7,000.

Why did this happen? Looking back, there may be several reasons.

First, the 75 basis point cut was relatively mild, with limited liquidity released. Second, the crypto market had just emerged from the 2018 bear market, and investor confidence was lacking.

Most importantly, traditional institutions were still on the sidelines, and the funds from this rate cut mainly flowed into the stock market, with the S&P 500 rising nearly 10% during the same period.

• 2020 Rate Cut Cycle: The Super Roller Coaster After the 3/12 Crash

In the first week of March, the market already sensed a crisis. On March 3, the Fed made an emergency 50 basis point cut, but bitcoin didn't rise—instead, it fell from $8,800 to $8,400. The market logic was: emergency rate cut = big economic problem = better run first.

The following week was the darkest moment for the crypto market. On March 12, bitcoin plunged from $8,000 to $3,800, a drop of over 50% in 24 hours. Ethereum fared even worse, falling from $240 to $90.

The classic "3/12" crash became a collective trauma for the crypto market.

This crash was actually part of a global liquidity crisis. Amid pandemic panic, all assets were being sold—stock market circuit breakers, gold falling, even US Treasuries dropping. Investors frantically sold everything for cash—even "digital gold" bitcoin was not spared.

Worse, high leverage in the crypto market amplified the drop. On derivatives exchanges like BitMEX, a large number of 100x leveraged long positions were liquidated, triggering a chain reaction like an avalanche. In just a few hours, total liquidations across the network exceeded $3 billion.

But just when everyone thought it was going to zero, a turning point arrived.

On March 15, the Fed announced a rate cut to 0-0.25%, and launched $700 billion in quantitative easing (QE). On March 23, the Fed went further with "unlimited QE." After bottoming at $3,800, bitcoin began an epic rebound:

• March 13, 2020: $3,800 (low point)

• May 2020: $10,000 (up 160% in 2 months)

• October 2020: $13,000 (up 240% in 7 months)

• December 2020: $29,000 (up 660% in 9 months)

• April 2021: $64,000 (up 1580% in 13 months)

• November 2021: $69,000 (up 1715% in 20 months)

It wasn't just bitcoin—the entire crypto market was partying. Ethereum soared from $90 to a peak of $4,800, a 53-fold increase. Many DeFi tokens rose by hundreds of times. The total crypto market cap ballooned from $150 billion in March 2020 to $3 trillion in November 2021.

Comparing 2019 and 2020, both had rate cuts, so why were market reactions so different?

Looking back, the answer is simple: the magnitude of the rate cut determined the scale of funds.

In 2020, rates were cut straight to zero, plus unlimited QE—essentially opening the floodgates. The Fed's balance sheet expanded from $4 trillion to $9 trillion, injecting $5 trillion in liquidity into the market.

Even if only 1% flowed into the crypto market, that's $50 billion—about a third of the total crypto market cap at the start of 2020.

Additionally, players in 2020 experienced a shift from extreme fear to extreme greed. In March, everyone was selling everything for cash; by year-end, everyone was borrowing to buy assets. This emotional volatility amplified price swings.

More importantly, institutions entered the market.

MicroStrategy began buying bitcoin in August 2020, accumulating over 100,000 coins. Tesla announced a $1.5 billion bitcoin purchase in February 2021. Grayscale Bitcoin Trust (GBTC) holdings grew from 200,000 coins at the start of 2020 to 650,000 by year-end.

These institutional purchases not only brought real money, but more importantly, brought endorsement effects.

• 2025: History Repeats?

Looking at the rate cut magnitude, on September 17 the market expects a 25 basis point cut—just the beginning. If we extrapolate from current economic data, the entire rate cut cycle (next 12-18 months) may see a cumulative cut of 100-150 basis points, with the final rate dropping to around 3.0-3.5%. This range is between 2019 (75 basis points) and 2020 (cut to zero).

From a market position perspective, bitcoin is already near its historical high of $115,000, unlike March 2020 when there was huge upside. On the other hand, it's also not like 2019, just emerging from a bear market—market confidence is relatively sufficient.

From an institutional participation perspective, the approval of bitcoin ETFs is a watershed moment. In 2020, institutions were making tentative purchases; now, there are standardized investment tools. But institutions have also gotten smarter—they won't FOMO and chase highs like in 2020-2021.

Perhaps in 2024-2025, we'll see a third script: neither the dullness of 2019 nor the madness of 2020, but a kind of "rational prosperity." Bitcoin may no longer see a 17-fold increase, but steady gains as liquidity gates open is a more convincing logic.

The key also depends on the performance of other assets. If the stock market and gold are both rising, funds will be diverted.

Performance of Traditional Assets During Rate Cut Cycles

Rate cut cycles not only affect the crypto market; the performance of traditional assets is also worth watching.

For crypto investors, understanding the historical performance patterns of these assets is crucial, as they are both sources of funds and competitors.

US Stocks: Not Every Rate Cut Brings a Bull Market

According to research data from BMO, we can see the detailed performance of the S&P 500 during rate cut cycles over the past 40+ years:

History shows that the S&P 500 usually delivers positive returns in the 12 to 24 months after the Fed's first or renewed rate cut.

Interestingly, if you exclude the tech bubble (2001) and the financial crisis (2007)—the two "black swans"—the average return of the S&P 500 before and after rate cuts is even higher.

This highlights the issue: the average return of the S&P 500 is just a reference; the actual performance of the stock market after a rate cut depends entirely on the reason for the cut. If it's a preventive cut like 1995, everyone is happy; if it's a firefighting cut (like the 2007 financial crisis), the market falls first then rises, and the process is extremely painful.

Looking further at individual stocks and sector structure, research from Ned Davis Research shows that defensive sectors in the US stock market perform better during rate cut cycles:

1. In four cycles where the economy was relatively strong and the Fed only cut rates once or twice, cyclical sectors like financials and industrials outperformed the broader market.

2. But in cycles where the economy was weak and four or more large cuts were needed, investors favored defensive sectors, with healthcare and consumer staples delivering the highest median returns at 20.3% and 19.9%, respectively. The much-anticipated tech stocks only managed a paltry 1.6%.

Additionally, according to research by Nomura Securities, in the three months after a 50 basis point rate cut, the S&P 500 barely changed, but the small-cap Russell 2000 index rose an average of 5.6%.

This also makes sense. Small companies are more sensitive to interest rates, as their borrowing costs are higher, so the marginal improvement from rate cuts is greater. Moreover, small-cap stocks often represent "risk appetite"—when they start outperforming the broader market, it signals a shift to optimism.

Back to the present, since the rate cut in September 2024:

• S&P 500: up from 5,600 to 6,500 points (+16%)

• Nasdaq: up from 17,000 to 22,000 points (+30%)

Compared to historical data, the current 16% annualized gain already exceeds the 11% average after previous Fed rate cuts. More importantly, the Nasdaq's gain is almost double that of the S&P 500. The S&P 500 was already at a historical high before the rate cut, which is rare in past cycles.

Bond Market: The Steadiest but Also the Most Boring

Bonds are the most "honest" asset in a rate cut cycle. When the Fed cuts rates, bond yields fall and bond prices rise—almost no surprises.

According to analysis by Bondsavvy, the decline in 10-year US Treasury yields during different rate cut cycles is quite stable:

• 2001-2003: down 129 basis points

• 2007-2008: down 170 basis points

• 2019-2020: down 261 basis points (pandemic special period)

Why was the drop in 2019-2020 especially large? Because the Fed not only cut rates to zero, but also launched "unlimited QE," directly buying bonds and artificially suppressing yields. Such unconventional operations don't occur in normal cycles.

• Progress in the Current Cycle

Based on the experience of 2001 and 2007, the total drop in 10-year US Treasury yields should be between 130-170 basis points. So far, it has dropped 94 basis points, so there may be 35-75 basis points of room left.

In price terms, if the 10-year yield drops another 50 basis points to around 3.5%, investors holding 10-year Treasuries could gain about 5% in capital gains. Not bad for bond investors, but for crypto players used to doubling their money, the returns may seem low.

However, for risk asset investors, bonds serve more as a "benchmark" for funding costs. If Treasury yields plummet while corporate bond yields rise, it means the market is seeking safe assets. At that point, risk assets like bitcoin are more likely to be sold off.

Gold: The Steady Winner in Rate Cut Cycles

Gold may be the asset that "understands" the Fed best. Over the past decades, almost every rate cut cycle has seen gold deliver solid returns.

According to research by Auronum, gold's performance in the last three rate cut cycles:

• 2001 rate cut cycle: up 31% in 24 months

• 2007 rate cut cycle: up 39% in 24 months

• 2019 rate cut cycle: up 26% in 24 months

On average, gold rose about 32% in the two years after a rate cut. This return isn't as exciting as bitcoin, but it's stable—all three times were positive, without exception.

• This Cycle: Outperforming Expectations

A 41% gain in one year has already surpassed any previous rate cut cycle over the same period. Why so strong?

First, central bank buying. In 2024, global central banks bought over 1,000 tons of gold, a record high. China, Russia, India, and others are all increasing holdings. They don't want all their foreign reserves in US dollars—so-called "de-dollarization."

Second, geopolitical risk. The Ukraine crisis and Middle East conflicts have made parts of the world increasingly unstable, and gold's rise increasingly includes a "war premium."

Third, offsetting inflation expectations. The US government debt-to-GDP ratio now exceeds 120%, with a fiscal deficit of $2 trillion a year. Where does this money come from? Only by printing. Gold is the traditional tool to hedge currency depreciation. When investors worry about the dollar's purchasing power, gold rises. Bitcoin has this logic too, but the market still trusts gold more.

Performance over the past year:

• Gold: +41% ($2,580→$3,640)

• Bitcoin: +92% ($60,000→$115,000)

On the surface, bitcoin wins hands down. But considering the difference in market cap—gold at $15 trillion, bitcoin at $2.3 trillion—gold's 41% gain absorbed much more capital. Historically, when gold rises more than 35% in a rate cut cycle, it usually enters a consolidation period. The reason is simple—profits need to be digested.

Final Thoughts

In September 2025, we stand at an interesting point in time.

The rate cut cycle has been underway for a year—not too fast, not too slow. Bitcoin at $115,000—not too high, not too low. Market sentiment is greedy but not crazy, cautious but not panicked. This in-between state is the hardest to judge and tests patience the most.

History tells us that the second half of a rate cut cycle is often more exciting. After the last two cuts in 1995, the US stock market kicked off the Internet bull run. Six months after the 2020 rate cut, bitcoin really took off.

If history rhymes, the next 6-12 months could be a key window.

But history also tells us there are always surprises. Maybe this time the surprise is an AI-driven productivity explosion, inflation disappears, and the Fed can cut rates indefinitely. Maybe the surprise is escalating geopolitical conflict, or a new financial crisis.

The only thing we can be sure of is change itself.

The dollar-dominated monetary system is changing, the way value is stored is changing, and the speed of wealth transfer is changing.

Crypto represents not just an investment category, but a microcosm of this era of change. So, instead of obsessing over whether bitcoin will reach $150,000 or $200,000, ask yourself:

Am I ready for this changing backdrop?

If your answer is yes, congratulations. The rate cut cycle is just the beginning—the real show is yet to come.