Could This Derail Bitcoin's Rally This Year?

After hitting $100,000 last year, crypto investors remain bullish that Bitcoin (CRYPTO: BTC) can continue its rally in 2025. In the long run, some of the most bullish advocates for the digital coin believe it can top $1 million or more.

There's no shortage of enthusiasm for crypto as it looks to gain some legitimacy and credibility under the new government. President Donald Trump is even looking at creating a reserve of Bitcoins, which would undoubtedly increase demand for the digital currency, helping to push its price up even higher.

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However, how Bitcoin performs can also depend significantly on how the economy performs. And there's a big risk crypto investors should consider this year, which is that there may not be many rate cuts forthcoming.

If interest rates don't come down -- can Bitcoin keep going up?

In early 2022, the Fed began raising interest rates in an effort to help curb inflation. That proved to be a bad year for risky investments, including crypto. Bitcoin would plummet by 65% that year, while the S&P 500 fell at a more modest pace of 19%.

But now, with interest rates coming down and the expectation that rates could go even lower, the path has been clear for Bitcoin to rally in value.

The problem, however, is that there may not be as many rate cuts as investors and analysts are hoping for. The Fed didn't reduce interest rates in January and some experts are now forecasting that there may only be two or three rate cuts this year. And some believe that there may be none if Trump goes ahead with imposing tariffs on the country's key trading partners, including Canada, Mexico, and China. That would increase costs for consumers, leading to higher inflation, which may result in the Fed pausing its plan to lower interest rates. And there's the outside chance that if inflation does creep up, there may even be a need for rate hikes.

If interest rates don't come down and there isn't even the expectation that they will, investors may be much less willing to invest in the stock market and speculative investments such as Bitcoin.

Bitcoin is already showing signs of stalling

In 2024, Bitcoin rose nearly 120% and took off after President Trump's election win due to the expectations from investors of more crypto-friendly policies to come under the new government.

As of the end of Monday, Bitcoin has continued to rise in value this year by a little under 10%. But it has been showing some volatility and choppiness, particularly when it comes to tariffs. On Feb. 3, with the threat of tariffs looming, the cryptocurrency fell to a low of just over $91,000 -- the lowest level it reached in weeks. If not for the news that tariffs were paused for both Mexico and Canada, the sell-off may have continued. Instead, Bitcoin bounced back and finish the day up over $101,000.

There's clearly a close relationship between investors' expectations for the economy and the prospect of more interest rate cuts, and the value of Bitcoin. Tariffs and trade wars could weigh heavily on the economy, and if that happens, Bitcoin may be vulnerable to a correction.

Investors shouldn't expect a smooth ride for Bitcoin this year

Bitcoin is coming off a strong performance in 2024, but investors should be careful not to assume that it's going to continue going higher again this year. There are many factors that could affect its price, and the economy is one of the biggest ones to consider, and that is proving to be a big unknown at this stage.

Whether the economy flourishes or falls into a recession or inflation takes off again due to tariffs, there is no shortage of question marks for investors to consider this year. At the very least, I would expect Bitcoin's volatility to continue in the months ahead.

Bitcoin isn't an investment I'd hold, but if you're willing to take a chance on the cryptocurrency, you may also want to consider holding some safer investments to help reduce your overall portfolio risk.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.