Written by: Gyro Finance
With the intervention of institutional capital, the crypto market has moved from independent market to sector linkage, and its closeness to the macroeconomic cycle has been increasing. Since the beginning of this year, mainstream currencies such as Bitcoin have taken turns to perform roller coaster dramas, repeatedly following the global market fluctuations. It is for this reason that macro indicators have become the focus of the crypto market. The U.S. federal funds rate, which has the greatest impact, has also been upgraded to an absolute industry weathervane.
Looking back at the role of this weathervane, from March 2022 to July 2023, the Federal Reserve raised interest rates 11 times in a row, with a cumulative increase of 525 basis points, setting a record for the largest interest rate hike in the Federal Reserve's interest rate regulation in nearly half a century. In this historic rate hike, banking institutions experienced a liquidity crisis again, and many institutions such as Silicon Valley Bank and First Republic Bank of the United States were inevitably sounded the death knell of the times. The crypto market also suffered a heavy blow. A typical case is the collapse of FTX. Although it is undeniable that FTX was full of sores inside, the key to piercing it was also the liquidity that was constantly tightening due to macro tightening at the time.
This year, although the success of ETFs has given cryptocurrencies a break, the gradually weakening liquidity has also caused the local deep bear market to still loom over the market. And just recently, with the September FOMC meeting approaching, after maintaining high interest rates for nearly a year, the macro market seems to have finally ushered in the dawn of light.
On September 5, according to CME's "Fed Watch" data, the probability of the Fed cutting interest rates by 25 basis points in September was 55%, and the probability of cutting interest rates by 50 basis points was 45%, while the probability of the Fed cutting interest rates by 50 basis points in September was only 38% a day ago. It can be seen that interest rate cuts have become a basic consensus in the market, but the magnitude remains to be considered.
Interest rate cuts mean the release of liquidity, which is usually a big boon for risky assets, and crypto assets are no exception. However, historical data shows that interest rate cuts are often accompanied by a sharp drop in stock prices, and the crypto market, which is highly correlated with U.S. technology stocks, may not perform as well as expected.
How will the upcoming rate cut affect the market? Whether it is a rain after a long drought or the calm before the storm is still a matter of debate, but the remarks of several industry analysts recently show that the key factor in the rate cut is the US economic situation, and the volatility risk is increasing as the rate cut approaches.
BitMEX co-founder Arthur Hayes recently wrote that interest rate cuts will not bring short-term benefits to Bitcoin. He emphasized the regulatory role of reverse repurchase agreements (RRP) in this dynamic.
RRP is an overnight tool for large banks and fund managers that allows banking institutions to earn higher returns and achieve broader gains compared to other safe investments. The agreement sells securities to a counterparty and agrees to repurchase them at a higher price at a future date. The current RRP interest rate is 5.3%, higher than the 4.38% Treasury yield. Hayes believes that the interest rate differential will cause large money market funds to transfer capital from Treasury bonds to RRP, thereby reducing the amount of funds available for riskier investments such as cryptocurrencies.
Against this backdrop, contrary to expectations, Hayes said that market liquidity could be more restricted in the next two weeks before the rate cut actually arrives. "Bitcoin will fluctuate around current levels in the best case scenario, and slowly fall to $50,000 in the worst case scenario as funds are withdrawn from Treasury bills and flow back to the reverse repo program."
Interestingly, even with the short-term bearish outlook, Hayes still said he would not sell any cryptocurrencies.
Analysts at Bitfinex analyzed the upcoming rate cut from historical data and expressed a more negative and aggressive view. He believes that due to the sluggish price trend in recent months, cryptocurrency investors had expected the Fed's September rate cut to drive the bull market, but escalating recession concerns may bring a deeper correction. "If the easing cycle coincides with a recession, Bitcoin may fall 15%-20% after the September rate cut. Assuming that the price of BTC is about $60,000 before the rate cut, the potential bottom will be between $50,000 and $40,000."
“Typically, rate cuts are seen as a positive catalyst for risk assets. A 25 basis point rate cut could mark the start of a standard rate cut cycle, which could lead to a long-term rally in Bitcoin prices as recession fears ease. Such a move would signal the Fed’s confidence in the economy’s resilience, thereby reducing the likelihood of a severe recession. On the other hand, a more substantial 50 basis point rate cut could lead to a short-lived 5%-8% rally in BTC, but then the gains would be erased as asset prices take a bigger hit as fears of an impending recession grow. Similar to past scenarios where large rate cuts initially boosted asset prices, but economic uncertainty curbed gains.”
In addition, seasonal effects are also unfavorable to Bitcoin. Historical data shows that Bitcoin has only achieved positive returns in September three times in the past decade since 2013. In September, Bitcoin's average monthly return was -4.78%, and the probability of closing in a loss was 72.7%, making it one of the worst performing months for the asset.
Markus Thielen, founder of 10x Research, agrees with this view. "If the Fed cuts interest rates in September 2024 simply because of an inflation crisis, this will be a short-term positive for Bitcoin. However, if the rate cut is caused by a recession, whether in September or later, Bitcoin will face huge selling pressure."
Historically, Bitcoin has seen the biggest gains when the Fed pauses its rate hike cycle, with the first rate cut typically causing a tepid reaction. "During the period when the Fed paused its rate hikes until July 2019, Bitcoin experienced explosive growth, returning 169%. After a seven-month pause in 2019, the Fed cut rates, kicking off a sharp rate cut cycle. Bitcoin reacted positively, rising 19% in the week following the rate cut on July 31, 2019. However, two weeks later, Bitcoin was back to flat," Thielen said, adding that the rate cuts in the second half of 2019 were due to increased economic uncertainty, which had an impact on BTC's price. CoinDesk data shows that BTC prices fell 33% in the second half of the year.
It can be seen that analysts' views are all centered around whether the US economy will have a soft landing. Although the data is not clear yet, the market has its own inclinations on this issue.
The EMC Labs article pointed out that the market as a whole tends to believe that the US economy will achieve a soft landing, so it has not priced the US stock market downwards under the expectation of a hard landing. Based on the assumption of a soft landing, some funds chose to withdraw from the "Big Seven" that had previously risen sharply, and entered other blue-chip stocks with smaller gains, pushing the Dow Jones Index to a record high.
Therefore, if the 25 basis point rate cut in September is finalized, and there are no major economic and employment data indicating that the economy does not meet the characteristics of a "soft landing", the US stock market will run steadily. If the Big Seven recovers upward, the BTC ETF will most likely resume positive inflows, pushing BTC upward and hitting the psychological barrier of $70,000 again, or even challenging new highs. If major economic and employment data show that the economy does not meet the characteristics of a "soft landing", the US stock market will most likely be revised downward, especially the Big Seven, and the corresponding BTC ETF channel funds will most likely not be optimistic, and BTC may go down and challenge the lower edge of the "new high repair period" of $54,000 again.
In an interview, Grayscale Research Director Zach Pandell also tended to believe that this rate cut was defensive in nature. He said that usually, the Fed cuts interest rates because of economic recession. But this time it is different. The Fed cuts interest rates because the protracted battle against inflation has achieved a phased victory.
“Rate cuts in the context of a soft landing are an environment that is unfavorable to the dollar and favorable to assets such as Bitcoin. This is my core view. I think the crypto market will retest its historical highs in the coming months. The main risk now is the health of the US economy. The positive view is based on a soft landing and avoiding a recession, which is also the view of most economists at present. Therefore, it is necessary to pay close attention to US labor market data.
If unemployment continues to rise, we see signs of layoffs, and a period of economic weakness emerges, Bitcoin and many other assets, such as technology stocks or credit spreads, will also weaken in a typical cyclical manner. But my view is that in a recession, it is an excellent time to accumulate Bitcoin, and then we will see loose monetary policy and loose fiscal policy to help the economy out of the recession, and prices will rebound accordingly. But if the US labor market continues to deteriorate and falls into a short recession, the downside risk to prices will become prominent, which is also the main risk we will see in the next 6 to 12 months. "
Matrixport's report echoes the above view. Bitcoin prices rebounded quickly after the August plunge. Although Bitcoin spot ETF funds are still flowing out, some investors are buying on dips. Judging from the rebound in the 30-day minting ratio, new fiat funds have flowed into the crypto market. Investors are taking advantage of low prices or making early arrangements for the expected interest rate cut by the Federal Reserve in September.
From the market point of view, despite the increase in short-term uncertainty, whales seem to have taken defensive measures and still show bullish signals in the long term. QCP data shows that the volatility curve is expected to steepen further, and more long option positions are extended to March next year. Bitcoin's call option with an exercise price of $120,000 expiring on March 28, 2025 has increased by 200 contracts recently, and the open interest has reached 2,100, indicating that investors remain optimistic about the medium and long-term prospects.
According to the analysis of industry insiders, a soft landing of the US economy is the prerequisite for the crypto market to be revitalized. If it is a soft landing, the interest rate cut will be a defensive one, but if it is not, the interest rate cut will be a recessionary one. After the US enters a recession, the crypto market, which is closely related to the macro cycle, will instead experience a decline. From the current data, the data reflecting the recession are differentiated. The US labor market is weak, but the volume and price of the consumer market are still supported, making it difficult to directly establish the trend. For ordinary users, it may be safer to pay attention to US macro data and wait for the direction after the interest rate cut before operating.
