In the week following the Fed’s jumbo rate cut, the performance of top crypto ETFs like the iShares Bitcoin Trust ETF (IBIT) and the iShares Ethereum Trust ETF (ETHA) far outpaced broad market benchmarks for stocks and bonds.

From the market’s open Sept. 18, the day the Federal Reserve announced its 50-basis-point rate cut, through the close yesterday, the largest spot bitcoin ETF, IBIT, jumped nearly 8% while ETHA rocketed over 15%.

This giant weekly increase for the top crypto ETFs compares to a 1.5% rise for stocks and 0.1% decline for bonds, as measured by the SPDR S&P 500 ETF Trust (SPY) and the iShares Core U.S. Aggregate Bond ETF (AGG), respectively.

The broader cryptocurrency market rallied last week, recording large inflows of $321 million, according to data from alternative asset manager CoinShares. The trend follows the Federal Open Market Committee's (FOMC) larger than expected rate cut.

Following the Fed’s aggressive cut, large gains by tech-led S&P 500 ETFs and at least a small increase for broad market bond funds as a relief rally for the rate-sensitive market segments would not have been surprising.

But buyers clearly favored cryptocurrencies over stocks and bonds last week.

Why Are Crypto ETFs Outperforming?

Cryptocurrency ETFs have likely received a boost following the Fed's rate cut due to several factors:

• Risk-on sentiment: Lower interest rates generally create a more favorable environment for riskier assets, including cryptocurrencies. Investors tend to move away from safer assets, such as bonds and money market funds, and seek higher returns in assets like equities and cryptocurrencies. As a result, demand for crypto increases, lifting the prices of crypto-related ETFs.

• Technical factors: Short-term technical factors, such as chart patterns or momentum indicators, might also be contributing to the rise in cryptocurrency ETF prices.

• Weaker U.S. dollar: Rate cuts can weaken the U.S. dollar, as lower interest rates make the currency less attractive to foreign investors. A weaker dollar often drives more investment into alternative assets like cryptocurrencies and gold, which are viewed as stores of value or hedges against currency devaluation.

• Increased liquidity and market confidence: Lower interest rates can lead to increased liquidity in financial markets, as investors have easier access to capital. This rise in liquidity tends to benefit speculative and growth-oriented investments, including cryptocurrencies. As a result, crypto ETFs, which track the performance of digital currencies, see price appreciation driven by greater market participation.

In summary, the Fed rate cut has boosted risk appetite, weakened the dollar, increased liquidity, and reinforced the perception of crypto as an inflation hedge—all factors that contribute to the strong performance of crypto ETFs.

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