The soft landing of the US economy is particularly important.
Author: Gyro Finance
With the intervention of institutional capital, the cryptocurrency market has transitioned from independent trading to sector linkage, and its correlation with the macroeconomic cycle has become increasingly strong. Since the beginning of this year, mainstream currencies such as Bitcoin have taken turns to stage roller-coaster performances, following the global market fluctuations. It is for this reason that macroeconomic indicators have become the focus of attention in the cryptocurrency market. The most influential factor, the US Federal Fund interest rate, has also become the absolute industry barometer.
Looking back at the role of this barometer, 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 pace of interest rate hikes in nearly half a century of Federal Reserve rate control history. In this historic round of rate hikes, banking institutions experienced a liquidity crisis, and several institutions such as Silicon Valley Bank and the First Republic Bank of the United States inevitably sounded the death knell of the times. The cryptocurrency market also suffered a heavy blow, with a typical example being the collapse of FTX. Although it cannot be denied that FTX was riddled with internal problems, the key factor that pierced it was the tightening liquidity due to macroeconomic contraction at that time.
Fast forward to this year, although the success of ETFs has given the cryptocurrency market some breathing room, the gradually weakening liquidity has still cast a shadow over the market. And just recently, with the upcoming September FOMC meeting, after maintaining high interest rates for nearly a year, the macro market seems to have finally ushered in the dawn.
On September 5th, according to CME's "Fed Watch" data, the probability of a 25 basis point rate cut by the Fed in September is 55%, and the probability of a 50 basis point rate cut is 45%, while just a day earlier, the probability of a 50 basis point rate cut in September was only 38%. It can be seen that a rate cut has become a basic consensus in the market, but the magnitude is still under consideration.
A rate cut implies liquidity release, which is usually a big positive for risk assets, and cryptocurrency assets are naturally no exception. However, historical data shows that rate cuts are often accompanied by a sharp drop in stock prices. The cryptocurrency market, which is highly correlated with US technology stocks, may not perform as expected.
What impact will the upcoming rate cut have on the market? Whether it will be a welcome relief or the calm before the storm is still a matter of debate. However, the recent statements from several industry analysts indicate that the nature of the rate cut, determined by the US economic situation, is crucial, and as the rate cut approaches, volatility risks are also increasing.
Arthur Hayes, co-founder of BitMEX, recently stated in an article that the rate cut will not bring short-term benefits to Bitcoin, emphasizing the regulatory role of the reverse repurchase agreement (RRP) in this dynamic.
RRP is an overnight tool for large banks and fund managers, allowing banks to achieve higher returns compared to other safe investments, resulting in a more widespread profit. The agreement involves selling securities to the counterparty and agreeing to repurchase them at a higher price on a future date. The current RRP rate is 5.3%, higher than the 4.38% yield on Treasury bonds. Hayes believes that the interest rate differential will cause large money market funds to shift capital from Treasury bonds to RRP, reducing the amount of funds available for high-risk investments such as cryptocurrencies.
In this context, contrary to expectations, Hayes suggests that in the two weeks leading up to the actual rate cut, market liquidity may face further constraints. "In the best case scenario, Bitcoin will fluctuate around current levels, and in the worst case, it will slowly decline to $50,000, as funds are being withdrawn from Treasury bonds and redirected to reverse repurchase agreements."
Interestingly, even in the event of a short-term decline, Hayes stated that he would not sell any cryptocurrencies.
An analyst from Bitfinex analyzed the upcoming rate cut based on historical data and expressed a more negative and aggressive view. He believes that due to months of sluggish price trends, cryptocurrency investors were originally expecting the September rate cut by the Federal Reserve to drive a bullish trend, but escalating concerns about economic recession may lead to a deeper pullback. "If the easing cycle coincides with an economic downturn, Bitcoin may fall by 15%-20% after the September rate cut. Assuming that the price of BTC before the rate cut is around $60,000, the potential bottom will be between $50,000 and $40,000."
"Typically, rate cuts are seen as a catalyst for risk assets. A 25 basis point rate cut may signal the start of a standard rate cut cycle, which, as recession concerns ease, could lead to a long-term increase in Bitcoin prices. This move will indicate the Fed's confidence in the resilience of the economy, thereby reducing the likelihood of a severe economic recession. On the other hand, a larger 50 basis point rate cut may lead to a temporary 5%-8% increase in BTC, but subsequently, as concerns about the impending economic recession intensify, asset prices will suffer a greater blow, erasing this increase. Similar to past situations: a significant rate cut initially boosted asset prices, but economic uncertainty suppressed the upward trend."
In addition, the seasonal effect is also quite unfavorable for Bitcoin. Historical data shows that since 2013, in the past decade, Bitcoin has only achieved positive returns three times in September. The average monthly return for Bitcoin in September is -4.78%, with a 72.7% chance of closing at a loss, making it one of the worst-performing months for this asset.
Markus Thielen, founder of 10x Research, also agrees with this view. "If the Fed cuts rates in September 2024 solely due to an inflation crisis, this would be a short-term positive for Bitcoin. However, if it is an economic recession that leads to the rate cut, whether in September or later, Bitcoin will face tremendous selling pressure."
Historically, when the Fed paused its rate hike cycle, Bitcoin saw the largest increase. The first rate cut usually triggers a lukewarm response. "During the period from the Fed's pause in rate hikes until July 2019, Bitcoin experienced explosive growth, with a return of 169%. After a seven-month pause in 2019, the Fed cut rates, initiating a sharp rate cut cycle. Bitcoin responded positively, rising 19% within a week after the rate cut on July 31, 2019. However, two weeks later, Bitcoin returned to a flat state," Thielen added, stating that the rate cuts in the second half of 2019 were due to increased economic uncertainty, which had an impact on BTC prices. CoinDesk data shows that BTC prices fell by 33% in the second half of 2019.
It is evident that analysts' views revolve around whether the US economy will experience a soft landing. Although the data is not yet clear, the market also has its own inclinations on this issue.
An article from EMC Labs points out that the overall market tends to believe that the US economy will achieve a soft landing, so it has not priced in an overall downward trend in US stocks under the expectation of a hard landing. Based on the assumption of a soft landing, some funds have chosen to withdraw from the "Big Seven," which had previously risen sharply, and enter other blue-chip stocks with smaller gains, driving the Dow Jones index to reach a historic high.
Therefore, if the 25 basis point rate cut in September is confirmed and there are no major economic and employment data indicating that the economy does not meet the characteristics of a "soft landing," US stocks will steadily operate. If the Big Seven recover, then the probability of inflows into BTC ETFs will likely increase, driving BTC to rise again and challenge the psychological barrier of $70,000 and even reach new highs. If major economic and employment data indicate that the economy does not meet the characteristics of a "soft landing," US stocks will likely undergo a downward correction, especially the Big Seven, and correspondingly, the probability of optimistic fund inflows into BTC ETF channels will not be high, and BTC may decline again to challenge the lower boundary of the "new high repair period" at $54,000.
Grayscale's research director Zack Pandel also leans towards the idea that this rate cut is a defensive move. He stated that typically, the Fed cuts rates due to an economic recession. However, this time is different, as the rate cut is a result of a phase victory in the ongoing battle against inflation.
"In the context of a soft landing, a rate cut is an environment that is unfavorable for the US dollar but favorable for assets such as Bitcoin. This is my core viewpoint. I believe that the cryptocurrency market will retest historical highs in the coming months. The main risk now is the health of the US economy, and the positive view is based on the premise of a soft landing and avoiding a recession, which is also the current view of most economists. Therefore, it is necessary to closely monitor US labor market data. If the unemployment rate continues to rise and signs of layoffs appear, indicating an economic slowdown, Bitcoin and many other assets, such as tech stocks or credit spreads, will weaken in a typical cyclical manner. But in my opinion, an economic recession is an excellent time to accumulate Bitcoin, and we will subsequently see loose monetary and fiscal policies to help the economy recover from the recession, leading to a price rebound. However, if the US labor market continues to deteriorate and enters a brief recession, the downside risk to prices will become apparent, which is the main risk we will see in the next 6 to 12 months."
A report from Matrixport echoes the above views, stating that after the sharp drop in August, the price of Bitcoin quickly rebounded. Despite outflows from Bitcoin spot ETF funds, some investors are buying on the dip, and from the 30-day coin issuance data, new fiat funds have flowed into the cryptocurrency market, as investors position themselves ahead of the expected rate cut by the Fed in September.
From the market perspective, despite increased short-term uncertainty, whales also seem to have taken defensive measures and continue to show long-term bullish signals. QCP data shows that the volatility curve is expected to steepen further, with more long call option positions being extended to March next year. Recently, 200 contracts of call options with a strike price of $120,000 expiring on March 28, 2025, were added, with an open interest of 2,100 contracts, indicating that investors remain optimistic about the medium to long-term prospects.
Looking at the analysis of industry professionals, a soft landing of the US economy is the prerequisite for the cryptocurrency market to regain vitality. If it is a soft landing, then the rate cut is a defensive move, but if not, then the rate cut is a recessionary one. After the US enters a recession, the cryptocurrency market, closely related to the macro cycle, will instead experience a downturn. Based on the current data, indicators of a recession are mixed, with the US labor market showing weakness but consumer market volume and prices still providing support, making it difficult to establish a clear trend. For ordinary users, it may be safer to focus on US macro data and wait for the direction after the rate cut before taking further action.
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