The Federal Reserve's interest rate cut cycle has started. Can Bitcoin replicate its historical trends in 2026?

The US Dollar Index experienced its largest annual decline since 2017 in 2025, dropping nearly 10%. As expectations for Federal Reserve rate cuts continue to heat up into 2026, analysts are beginning to focus on how this macro backdrop could potentially drive Bitcoin’s performance. According to the latest news, Polymarket predicts a 96% chance that the Fed will cut rates before June, while several industry experts believe that the rate-cutting cycle will become a key catalyst for the crypto market.

The Chain Reaction of a Weakening Dollar and Rate Cut Expectations

The Reality Behind Dollar Depreciation

The significant decline of the US Dollar Index in 2025 is not just market speculation but an established fact. The Federal Reserve has already completed three rate cuts in 2025, lowering the benchmark interest rate from high levels to a range of 3.5%-3.75%. These policy adjustments have directly reduced the attractiveness of the dollar—when dollar yields decrease, dollar-denominated assets tend to depreciate relative to others, prompting investors to seek alternative stores of value.

According to recent reports, the Fed has injected as much as $16 billion in liquidity, the second-largest liquidity infusion since the COVID-19 pandemic began. This not only reflects the current accommodative policy stance but also sends a clear signal to the market: the Fed remains in an easing mode.

The Strength of Rate Cut Expectations in 2026

Market expectations for rate cuts in 2026 are quite optimistic. Although Fed officials have differing views on future policy directions (the latest dot plot shows nearly equal split among officials on “zero, one, or two rate cuts”), market data from Polymarket indicates a strong anticipation of rate cuts—96% probability before June.

A key detail to note is that while disagreements among Fed officials exist, they do not alter the overall policy direction. ING Chief International Economist James Knightley explicitly states that the Fed remains in an easing mode, which is crucial for understanding the policy framework in 2026.

Why a Rate Cut Cycle Is Favorable for Bitcoin

Transmission Mechanism Analysis

The transmission path from monetary policy easing to asset prices is relatively clear:

• Rate cuts lower dollar yields, reducing the dollar’s appeal to capital
• Increased liquidity supports risk assets
• Inflation expectations rise, prompting investors to seek inflation-hedging assets
• Bitcoin, as “digital gold” and a non-sovereign currency, becomes an ideal alternative

According to the latest reports, Timot Lamarre, Director of Market Research at Unchained, believes that monetary easing will benefit Bitcoin. Owen Lau, Managing Director at Clear Street, straightforwardly states that rate cuts will be a key catalyst attracting retail and institutional investors into the crypto market in 2026.

Historical Context and Current Environment

Although the news does not provide detailed historical data comparisons, related information suggests that the policy environment in 2026 bears similarities to the large-scale liquidity injections during the COVID-19 pandemic in 2020—periods characterized by massive liquidity releases and dollar depreciation. That wave of liquidity led to a crypto bull market, and similar conditions now fuel market expectations for Bitcoin’s prospects.

Uncertainties That Cannot Be Ignored

Variables in Policy Implementation

Despite strong expectations for rate cuts, the policy path in 2026 is not set in stone. Disagreements among Fed officials indicate significant differences in economic outlooks. If the labor market unexpectedly weakens or inflation data surpasses expectations, the pace of rate cuts could accelerate; conversely, if inflation rebounds, rate cuts might be delayed or halted altogether.

Recent reports show CME data indicating only a 20% chance of a rate cut in January, rising to 45% by March. This suggests limited certainty about near-term rate cuts, with more expectations concentrated in the second half of the year.

Potential Impact of Leadership Changes

A noteworthy variable is the potential change in Fed leadership. Powell’s term ends in May, and Trump may appoint a more dovish successor. Industry sources generally view this as an important factor influencing the 2026 crypto market. The new chair’s policy stance could directly alter the pace and intensity of the rate-cut cycle.

Summary

The expectation of Fed rate cuts provides a solid basis for supporting Bitcoin in 2026: the US Dollar Index has already fallen sharply, liquidity is increasing, and official policy signals remain accommodative. Under these conditions, Bitcoin indeed has the potential to replicate its historical performance during periods of abundant liquidity.

However, it is also important to recognize that policy implementation in 2026 remains uncertain. Inflation trends, employment data, disagreements among Fed officials, and the possible leadership change in May will all influence the final policy outcome. For investors, the key is to closely monitor the Fed’s actual actions rather than just expectations—expectations can change, but real liquidity injections are the fundamental driver of asset prices.