The Federal Reserve raised interest rates in September for the first time since 2023. And following yesterday’s decision to hold rates steady, markets are pricing in a high probability of another hike in December.

That should be creating serious headwinds for Bitcoin.

Yet Bitcoin is still trading around $80,000, well above its summer lows near $60,000.

Meanwhile, investors continue to put money into Bitcoin exchange-traded funds (ETFs), despite the prospect of even higher interest rates.

So what’s keeping Bitcoin afloat?

Let’s break down why rising rates aren’t hurting Bitcoin… and why it looks like the leading crypto could be setting up for another leg higher.

Why Bitcoin’s resilience is so surprising

When interest rates rise, investors generally become more selective about where they put their money—especially when they can earn attractive yields by keeping their money in cash or short-term Treasuries.

Assets that produce no income, like Bitcoin and gold, become less attractive relative to bonds and cash.

We’ve already seen some of that pressure play out in gold.

The precious metal hit a record high of $5,595 an ounce in January. Today, it’s trading around $4,044.

Bitcoin, meanwhile, has recovered considerably from its summer lows. And while it remains volatile, it’s holding up better than many investors might expect in a rising-rate environment.

Moreover, total assets held by U.S. spot Bitcoin ETFs increased from roughly $79.5 billion in early August to around $104 billion this week. Some of that increase reflects Bitcoin’s price recovery. But there’s also evidence of fresh buying.

On Wednesday, Bitcoin ETFs attracted approximately $137 million in net inflows, marking their third consecutive trading day of positive flows.

Over those three sessions, the funds took in roughly $424 million.

Simply put, Bitcoin is attracting buyers even as investors have plenty of alternatives right now.

The question is, why?

The answer may have a lot to do with America’s growing debt problem… and if so, Bitcoin could be poised for another significant rally.

Why investors are looking beyond the dollar

The U.S. government’s debt problem continues to grow. The national debt has now surpassed $40 trillion. Interest payments alone now run at more than $1 trillion annually.

Higher rates make that problem worse. As older government debt matures, the Treasury may have to refinance it at higher interest rates. That means an increasingly large portion of federal spending could go toward servicing existing debt.

And unless the government brings its deficits under control, it will need to keep borrowing to fund its operations.

That raises an uncomfortable question: How can the government manage its growing debt burden and minimize harm to the economy?

One possibility is that the Fed eventually cuts interest rates or otherwise eases financial conditions to help support the economy. That could make government debt easier to finance over time.

The problem is that if policy becomes too loose, it could fuel inflation and further erode the dollar’s purchasing power. That, in turn, could drive concerned investors to diversify some of their wealth outside of the dollar. 

And there aren’t a lot of great alternatives. The U.S. dollar remains the world’s dominant reserve currency, and alternatives like the euro and Chinese yuan come with their own concerns.

That’s where gold and Bitcoin come in.

Gold has served as a store of value for thousands of years. Its supply is limited by the availability and cost of mining new metal.

Bitcoin is much newer, but one of its biggest appeals is that its supply is also constrained. Its issuance follows a predetermined schedule, and the total supply is capped at 21 million coins. No central bank can simply decide to create more Bitcoin to finance government spending.

That doesn’t mean Bitcoin is immune to inflation, market crashes, or speculation. Its price can fluctuate dramatically, and its ability to preserve purchasing power over shorter periods is far from guaranteed.

But for investors concerned about the dollar’s long-term value, those supply characteristics can be attractive.

Simply put, some investors may be willing to forgo today’s interest income for an asset they believe could protect their wealth over the long term. 

As a result, more money will likely flow into assets like Bitcoin and gold as concerns about debt and government spending grow.

How to approach Bitcoin today

Bitcoin could get another boost if the Fed eventually shifts toward easier monetary policy.

Fed Chair Kevin Warsh has assembled five task forces to review how the central bank operates. They’re expected to report their findings in the coming months, and their recommendations could pave the way for lower rates.

That’s far from guaranteed. And with the Fed still focused on fighting inflation, investors shouldn’t assume easier monetary policy is right around the corner. Bitcoin remains risky and volatile. It wouldn’t be surprising to see another sharp pullback toward $70,000–$75,000.

But if falling interest rates eventually make cash and bonds less attractive, investors will likely move more money into crypto.

For investors who want Bitcoin exposure but don’t currently own any, the smart move is to start accumulating Bitcoin gradually rather than making one large purchase. Then, have a plan to add more over time, whether Bitcoin trades higher or lower.

That approach offers a few advantages: If Bitcoin pulls back, investors have cash available to take advantage of lower prices… But if it continues climbing, they already have some exposure.

And by building a position over time, investors reduce their reliance on getting the entry price exactly right.

The bottom line

Despite rising interest rates, attractive cash yields, and intense competition for investment capital, Bitcoin remains resilient.

Part of that strength may reflect a longer-term shift in how investors view the asset. As government debt continues to grow and few compelling alternatives exist to the U.S. dollar, Bitcoin and gold will likely attract an increasing share of investment capital.

If the Fed eventually pivots toward easier monetary policy, Bitcoin could get another significant boost as fears of dollar debasement grow.

For now, the smart strategy is to accumulate gradually and maintain enough cash to take advantage of volatility.

For more on Bitcoin, the Fed, and where Frank and Daniel are putting their money in today’s volatile market, stay tuned to Wall Street Unplugged.