WealthBee Monthly Report: The Federal Reserve Signals Restart of Rate Cuts in September, Hidden Opportunities in the Rotating Crypto Market

The recent signals of interest rate cuts from the Federal Reserve have further heated market expectations for liquidity easing, prompting some funds to flow into the crypto market in advance. As an emerging asset class, its narrative of hedging traditional risks and serving as a store of value continues to attract institutional interest.

In the current intertwining of global economic recovery and uncertainty, every move of the Federal Reserve's monetary policy remains a focal point for investors.

At the end of August, Federal Reserve Chairman Powell sent a clear signal of a shift in monetary policy to the market. He not only changed his hawkish stance from July, where he emphasized that "inflation risks outweigh employment risks," but also warned of the downside risks to employment leading to "significant layoffs and rising unemployment rates." This statement caused market expectations for a rate cut in September to soar from 75% to over 90%, marking a shift in the Federal Reserve's policy balance towards promoting employment.

Powell's shift is not without reason; it reflects the significant slowdown in U.S. economic momentum. The annualized GDP growth rate for the U.S. in the first half of 2025 averaged 1.2%, far below the 2.5% in the same period of 2024. More critically, while the unemployment rate appears stable at 4.2%, underlying weaknesses are evident: the U.S. added only 73,000 non-farm jobs in July, significantly below the expected 104,000, marking the smallest increase since October of the previous year, and the non-farm employment figures for May and June were revised down by a total of 258,000. This indicates that the strength of economic expansion has diminished significantly.

However, the path to rate cuts is not without obstacles, as inflation remains a variable that the Federal Reserve cannot ignore. Although Powell assessed that the price impact from tariffs is more likely a "one-time shock" rather than persistent inflation, and the five to ten-year inflation expectation for August fell to 3.5% (below the expected 3.9%), the CPI data for August (which has not yet been released at the time of writing) will be the "deciding factor" for whether to cut rates in September. If the August inflation data rises significantly above expectations (for example, if the CPI month-on-month growth exceeds 0.5%), it may still force the Federal Reserve to reassess its decision.

Moreover, the U.S. economy is still shrouded in the shadow of "stagflation." On one hand, economic growth is slowing; on the other hand, inflationary pressures have not completely dissipated due to tariffs and tightening immigration policies. This complex situation of "slowing growth alongside price pressures" suggests that Powell's dovish turn reflects a lack of confidence, and his language has become more cautious.

The future policy path of the Federal Reserve will heavily depend on data, especially when inflation and employment targets conflict. If inflation risks surpass employment risks, Powell may also halt rate cuts. Therefore, while we embrace the short-term asset price euphoria brought by rate cut expectations, we must remain clear-headed about the complexities of the economic fundamentals and the volatility of monetary policy.

Since the beginning of this year, U.S. stocks have performed strongly under the dual drivers of the AI revolution and expectations of policy shifts. In the first half of the year, U.S. stocks have repeatedly hit new highs, with technology and growth stocks leading the way. By the end of August, the S&P 500 index had risen nearly 10% year-to-date, repeatedly setting historical records, and at one point breaking through the 6500-point mark.

From the earnings reports, corporate profits are a key factor supporting market capitalization. The Q2 earnings reports for U.S. stocks in 2025 were outstanding, particularly for AI-related companies, which have become the core driving force behind this round of U.S. stock market gains. Nvidia (NVDA), as a bellwether in the AI field, reported a significant year-on-year revenue growth of 56% in its second-quarter earnings. Although data center revenues were slightly below expectations, the overall performance confirmed the sustainability of the AI boom, boosting market confidence. Other chip stocks also performed well, with Broadcom (AVGO) and Micron Technology (MU) rising by 3%. AI concept stock Snowflake (SNOW) saw its stock price soar by about 21% due to better-than-expected earnings.

HSBC's analysis points out that AI has had a significant impact on businesses, with 44 S&P 500 companies achieving 1.5% operational cost savings and an average efficiency improvement of 24% through AI, which has somewhat offset the pressures from tariffs. The Federal Reserve's monetary policy expectations have also provided important support to the market, with the high probability of a rate cut in September boosting the performance of risk assets like U.S. stocks.

However, despite the strong performance of U.S. stocks, their valuations are at historical highs. As of August, the expected price-to-earnings ratio of the S&P 500 index is approximately 22.5 times, which, while lower than historical peaks, is still well above the average level of 16.8 times since 2000.

Overall, the U.S. stock market in August 2025 has seen a significant increase in risk appetite due to the combined effects of AI innovation, relatively robust economic fundamentals, and expectations of loose monetary policy. Although high valuations suggest that the market should remain vigilant, the strong growth in corporate profits and the potential onset of a rate-cutting cycle make U.S. stocks still considered attractive.

The Bitcoin market demonstrated unprecedented maturity in August 2025.

On one hand, according to JPMorgan analysis, the six-month rolling volatility of Bitcoin has plummeted from nearly 60% at the beginning of the year to about 30%, setting a historical low. At the same time, the volatility ratio of Bitcoin to gold has also dropped to an all-time low, significantly enhancing Bitcoin's appeal to institutional investors.

The decrease in volatility is primarily attributed to the influx of institutional funds into regulated investment vehicles such as the U.S. spot Bitcoin ETF, which now holds over 6% of Bitcoin's total supply, as well as the ongoing allocation of Bitcoin by corporate treasuries (the DAT trend). These factors have collectively "locked in" a portion of the circulating supply, reducing market float.

The DAT (Digital Asset Treasury) trend deepened in August, with its core being that publicly traded companies and institutions are treating Bitcoin and other cryptocurrencies as strategic reserve assets. Particularly for publicly traded companies, their capital allocation is shifting from project investments to holding cryptocurrencies on their balance sheets, essentially "backing" cryptocurrencies with their own balance sheets. This not only provides continuous purchasing power to the market, making them one of the strongest buyers, but also offers strong support for coin prices. For companies, taking Strategy (MSTR) as an example, as long as the company's market value exceeds the actual value of the Bitcoin on its balance sheet, there is an opportunity to finance from the market through methods such as private placements, issuing convertible bonds, or selling preferred stocks, and then use those funds to purchase more Bitcoin. This way, the company can accumulate more coins at a lower cost. Statistics show that by mid-August, DAT cumulative financing had exceeded $15 billion in 2025, significantly higher than the scale of crypto VC during the same period. Leading institutions view DAT as an alternative/supplement to ETFs, emphasizing liquidity and flexibility advantages. At this year's Bitcoin Asia 2025 (Hong Kong) event, the DAT trend also became a hot topic of discussion in the industry.

At the same time, favorable policies continue to emerge. Bitcoin, as the only cryptocurrency officially included in sovereign reserves, is seeing its global regulatory framework becoming increasingly clear. For example, the passage of the U.S. CLARITY Act and the repeal of the SAB 121 accounting guidelines have paved the way for traditional financial institutions like banks to hold Bitcoin directly. This has also prompted other countries, such as Norway and the Czech Republic, to consider including Bitcoin in their foreign exchange reserves. In August, U.S. President Trump officially signed an executive order allowing 401(k) retirement accounts to invest in Bitcoin and other digital assets. This move opens the door for the U.S. retirement system, which is as large as $12.5 trillion, to enter the crypto market. Market analysis suggests that even if only 1% of retirement funds are allocated, it could bring tens of billions of dollars in potential incremental demand, which represents significant long-term purchasing power.

It is worth mentioning that there has been significant capital rotation within the crypto market in August. Bitcoin ETFs experienced notable capital outflows, with net outflows exceeding $2 billion. In contrast, Ethereum ETFs attracted substantial institutional funds, with net inflows of about $4 billion. This reflects a shift among some investors towards exploring the growth potential of Ethereum and other ecosystems after Bitcoin reached a historical high. However, the rotation pace was also swift, with Ethereum ETFs experiencing a $164.6 million outflow by the end of August, indicating short-term fluctuations in market sentiment.

Despite the short-term capital rotation, the continued entry of top financial institutions signifies that cryptocurrencies have officially been integrated into the traditional financial ecosystem. According to Bloomberg, BlackRock's Bitcoin spot ETF attracted several top global financial institutions in the second quarter of 2025, with holdings spread across proprietary and client funds from hedge funds, market makers, to large banks. JPMorgan analysis indicates that based on risk-adjusted valuations, Bitcoin's "fair price" should be around $126,000, suggesting potential upside compared to gold.

In summary, the significant decline in Bitcoin's volatility, the evolution of institutional adoption models, and the acceleration of internal capital rotation in August all indicate that the crypto market is undergoing profound structural changes. While short-term capital flows may still fluctuate, the institutional foundation and macro dynamics supporting the long-term value of cryptocurrencies have become increasingly solid.

In the long run, against the backdrop of a rate-cutting cycle boosting risk appetite and the continuous improvement of the crypto ecosystem, the resilience of Bitcoin as a core asset will continue to attract capital inflows, and the short-term fluctuations brought by market rotation may provide better positioning opportunities for bullish funds.