Many investors and traders in the market are confused by the stagnation of Bitcoin prices despite the Federal Reserve’s first rate cut since 2020. In a new post on X, Andrew Kang, CEO of Mechanism Capital, addressed the issue of market participants over-emphasizing the Fed’s rate cuts and China’s economic stimulus measures.
Why is Bitcoin stagnant?
Kang questions the widely held view that the Fed’s rate cuts will significantly boost Bitcoin and cryptocurrency prices. “The Fed rate is just one of the factors that affect global liquidity, which itself is just one of the factors that affect cryptocurrency prices,” he said. Kang believes that “it is ridiculous to see BTC rise 4.5 times during a period when interest rates are at their highest level in decades — indicating that there is almost no correlation between interest rates and BTC — and then expect a strong negative correlation when interest rates start to fall.”
He acknowledged that some people believe future interest rate changes are already priced into the market, but he countered that logic should apply equally to rate hikes and cuts. “It’s not that interest rates aren’t important, but most market participants put too much weight on them,” Kang added. He noted that stocks are more closely tied to interest rates because of factors such as the discount rates used to value cash flows and the mature corporate debt market used to finance growth.
Speaking about China’s recent economic stimulus, Kang said that its impact on Bitcoin and cryptocurrencies is even smaller than many people think. “Not surprisingly, those who think that China’s stimulus is extremely favorable for cryptocurrencies are mainly non-Chinese,” he commented. According to Kang, the Chinese have noticed that investments in the stock market have shifted from cryptocurrencies to A-shares.
Kang backed up his claim with data, noting: “USDT has been trading at a discount to the RMB since China announced its stimulus package. As of recently it was still at 3%.” This suggests that demand for major stablecoin Tether (USDT) in China has fallen, in line with the trend of traditional stocks.
Despite Kang’s criticism, he clarified that he is not bearish on Bitcoin. “I just think some people are a little complacent,” he commented. Kang expects Bitcoin to trade between $50,000 and $72,000 before a new major catalyst emerges.
However, he remains optimistic about opportunities in the market, stating: “The continued flow of capital and development of new projects means there will still be tokens to buy that will generate bull market returns.” Still, Kang warned that leveraged positions could bring volatility: “If leverage is too high (and it is currently quite high), the market is still prone to small corrections.”
X user Jakubko (@erkousti) said in an interaction with the community that Bitcoin's price increase in 2023 has more to do with the expected launch of the ETF than with interest rates. Kang agreed, responding: "That's exactly my point. Interest rates are only a small part of the puzzle. Although interest rates are negative for BTC, other factors such as ETFs can also drive BTC prices up. Other factors may drive it up or down here. We can't guarantee that the price will rise indefinitely just because the interest rate is cut."
Crypto analyst Astronomer (@astronomer_zero) agreed, commenting: "I think interest rates (and yield inversions) have minimal impact on prices. They are more of an important overall indicator for bond market participants. But zero impact on stocks or cryptocurrencies has been proven."
Another analyst, Res, highlighted Bitcoin’s correlation with money supply: “BTC is more correlated with the amount of money than it is with interest rates. As RRP falls, it starts to rise, eventually creating net positive liquidity regardless of interest rates, which are indeed near their highest point.”
At press time, BTC is trading at $60,903.
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