As we enter a cycle of interest rate cuts, market collapse and restart seem to happen in a flash. What are the hidden market factors?
With the Federal Reserve officially cutting interest rates by 50 basis points, the last shoe on the macro level of the crypto market this year has finally landed.
Looking back now, among the three clear positives that the market is most looking forward to in 2024 - spot Bitcoin ETF, Bitcoin halving, and Federal Reserve interest rate cut, ETF pushed Bitcoin to break through 70,000 US dollars and hit a record high; the halving did not. Expectations generally bring significant market volatility.
While the relevance of macro conditions to Bitcoin is often debated, macro cycles, especially US dollar liquidity (as a function of monetary policy/interest rates, risk appetite, etc.), remain the main drivers of medium- to long-term asset prices. Today, the market consensus on the start of the Fed’s rate cut cycle seems to be mostly bullish, and it is generally believed that this is a tradable event. Has the bull market started? Is there still a possibility of a fall?
The interest rate cut cycle has begun, and the market is bullish overnight?
Since the beginning of 2022, the US federal funds rate has entered an upward cycle. Until the third quarter of 2023, the Federal Reserve intensively raised interest rates to combat US inflation. Between January 2022 and August 2023, the effective interest rate increased from 0.08% to a target rate between 5.25% and 5.5%.
Now, with the Federal Reserve announcing a 50 basis point rate cut on September 18, lowering the target range of the federal funds rate to between 4.75% and 5.00%, it means that this round of tightening cycle has officially ended, and the published dot plot also shows that it is expected that the interest rate will continue to be cut by 50 basis points this year.
Although the first interest rate cut was delayed by four months compared to market expectations, driven by this, the market's positive sentiment in the cryptocurrency industry has significantly strengthened, and people have begun to tend to invest funds in Bitcoin and other crypto assets.
The reason is very simple. Previously, the US money and bond markets, as the largest pools in the financial market, were full of liquidity. Now that interest rates have entered a downward cycle, the attractiveness of the money and bond markets will decrease, and people will begin to prefer investing their funds in assets that offer higher risks and returns.
Therefore, after the news was announced, the market sentiment was ignited in an instant. Bitcoin has now reached the 64,000 level, and Ethereum also avenged its previous defeat today by breaking through 2,500 and heading towards the 2,600 level.
No-brainer bullish?
For Bitcoin, this 50 basis point rate cut sends mixed signals. Historically, rate cuts are good for hard assets like Bitcoin because they usually bring inflation and capital inflows into assets that can serve as a store of value. But this rate cut is different from traditional monetary easing and more like an emergency response to growing economic instability. If the market sees this rate cut as a signal that the US economy is more serious than expected, Bitcoin may be caught in a risk-off sell-off.
In recent weeks, Bitcoin has struggled to maintain the gains it made earlier in the summer. After reaching a high of $65,000 in August, it fell below $59,000 against the U.S. dollar, reflecting widespread uncertainty and concerns about the Federal Reserve's next move. With a 50 basis point rate cut in sight, Bitcoin could face more volatility in the coming weeks as investors reassess economic conditions.
Some hidden fermentation events in the market in the past few months may also become overlooked positive/negative factors.
US spot ETFs continue to see inflows
Since July, the Bitcoin spot ETF has seen a new wave of capital inflows. Although it has experienced a significant weekly decline since the beginning of this month, the overall situation has reversed significantly compared to April and May.
As of the time of writing, the total net asset value of the Bitcoin spot ETF is US$54.85 billion, the ETF net asset ratio (market value as a percentage of the total market value of Bitcoin) is 4.61%, and the historical cumulative net inflow has reached US$17.44 billion.
The crypto regulatory wheel turns
The wind starts from the tip of the green reed. Against the backdrop of the 2024 election year, the macro environment has clearly improved recently, both at the regulatory level and at the funding level, brewing a new round of catalysts.
The U.S. Securities and Exchange Commission (SEC) quickly approved the Ethereum spot ETF, which means that the U.S. regulator's stance has shifted from a tough stance to a soft stance.
In particular, the American political circles have also begun to try frequently: For the encryption industry, the United States in 2024 has become a political show that is completely different from the 2020 and 2016 elections - whether it is the agenda setting during the entire election cycle or the public statements of the presidential candidates of both sides, they have unprecedentedly begun to involve cryptocurrencies, and the candidates of both sides are even "comparing" their open attitudes.
Overall, the election year is definitely a key factor. For the United States, the group that directly or indirectly holds cryptocurrency has become a force that cannot be ignored, especially when the poll data is tight, the "critical few" are very popular.
Current operation
The overall market will still correct normally, but under the current conditions, the market will not fall much. This is mainly because of the copycats. There is still no overflow of liquidity. Once the overall market moves, the copycats will still be in trouble. Therefore, those who have made good short-term profits should exit. There will definitely be good positions to take over from the copycats.
Bitcoin will touch 6.5 and then retreat to 6 to hit the support. At this time, it will be a good position to deploy copycat stocks. This is also the trend I expect most. If Bitcoin goes up strongly, it will not be too late to chase copycat stocks then.
End of the article
In general, in this market environment where the market is both cold and warm, there are still quite a lot of positive factors slowly fermenting. As long as you observe carefully, people will still have confidence in the future market. With the start of a new round of interest rate cuts and the dust settling on the 2024 US election, Web3 and the encryption industry may really enter a new cycle.
