Bitcoin may avoid another steep decline if the Federal Reserve keeps interest rates unchanged, according to Grayscale Head of Research Zach Pandl. Still, Grayscale said its traditional four-year cycle model continues to indicate that Bitcoin could reach a market bottom in September or October.

The asset manager presented both views in its latest research as it assessed Bitcoin's recent pullback from its $125,000 cycle peak. Grayscale's model suggests any further decline could be milder than in prior cycles, while Pandl said Bitcoin may already have bottomed if U.S. economic growth remains stable and the Federal Reserve does not raise rates further.

Four-Year Cycle and Macro Frameworks Differ

Grayscale said Bitcoin investors are currently weighing two main frameworks for understanding the market. One is the historical four-year cycle associated with Bitcoin halving events, the roughly every-four-year reduction in new Bitcoin supply issued to miners. The other centers on macroeconomic conditions, including economic growth and real interest rates — nominal rates adjusted for inflation expectations.

Under the cycle-based framework, Bitcoin has typically reached its lowest point roughly one year after a market peak. The same model also places the bottom about two and a half years after each halving. Previous bear markets, Grayscale noted, have produced average drawdowns of about 80%.

Using that history, the firm said Bitcoin could still fall before setting a low in September or October. However, Grayscale said it does not expect losses to match earlier cycles because institutional participation in Bitcoin has increased, a trend accelerated by the January 2024 approval of U.S. spot Bitcoin exchange-traded funds.

Federal Reserve Policy Remains Central

Pandl said Bitcoin has increasingly behaved like a mature financial asset rather than moving only in line with halving-driven cycles. He said prior downturns often occurred alongside slowing economic growth or rising real interest rates.

The latest decline has also taken place as expectations for Federal Reserve policy have shifted. For that reason, Grayscale said Bitcoin may already have reached its bottom if economic growth stays stable and the Fed avoids further rate increases.

Pandl also said additional rate hikes prompted by persistent inflation could prolong the downturn. Grayscale identified progress on the CLARITY Act — proposed U.S. legislation aimed at establishing a regulatory framework for digital asset markets — as another factor that could affect the market outlook.

Strategy's Cash Reserve Eases Financing Concerns

Grayscale also reviewed Strategy's recent treasury actions in its discussion of Bitcoin's market structure. Strategy, formerly known as MicroStrategy, is one of the largest publicly traded corporate holders of Bitcoin. On July 6, the firm examined Strategy's sale of 3,588 Bitcoin for about $216 million.

Strategy used the proceeds to meet preferred-share dividend obligations and raise its dollar reserve to about $2.55 billion. Grayscale said that balance could cover nearly 17 months of dividend payments.

The firm added that Strategy's stronger cash position reduced concerns about emergency financing or additional Bitcoin sales during periods of market volatility. However, Pandl said downside risks remain if the CLARITY Act stalls, treasury companies continue deleveraging, or the Federal Reserve resumes raising interest rates.