50 Basis Points Cut By The Fed, An Imminent Danger For Bitcoin?

The recent FED decision to cut its key rates divides crypto analysts. While some hope for a boosting effect on Bitcoin, others fear a negative reaction. As the FED could start a cycle of rate cuts, a 50 basis point reduction, expected next week, could surprise the markets. This could affect risky assets, including Bitcoin, by highlighting deeper economic concerns.

Bitcoin: The reaction to the rate cut by Jerome Powell

The FED, after capitulating, is about to start a cycle of rate cuts, but according to 10x Research, this could sound the alarm for Bitcoin. An aggressive rate cut could signal economic concerns rather than confidence, putting pressure on risky assets like Bitcoin.

Currently, traders estimate less than a 30% chance for a 50 basis point cut next week. Indeed, such a decision could reflect growing concern about the economy, pushing investors to reduce their exposure to risky assets, including Bitcoin.

Markus Thielen, founder of 10x Research, noted that this cut could indicate deeper economic concerns.

Conversely, a more modest cut could be perceived as a prudent measure rather than a signal of economic panic. This could mitigate the negative effects on Bitcoin and other risky assets. 

Hypotheses:

• A 50 basis point cut could signal increased economic concern, putting pressure on Bitcoin, potentially reducing its value by 5 to 10%;
• A more modest 25 basis point cut could be seen as a prudent measure, minimizing negative effects on Bitcoin and leading to limited fluctuation of 2 to 5%;
• Anticipation of a rate cut could already be priced into BTC, making the actual impact of the FED’s decision relatively weak, with expected variations around 3%.

However, uncertainty about the actual size of the cut keeps BTC investors on their toes.

Key Crypto: Impact and Reactions

The cycle of rate cuts could also affect the dynamics of cryptocurrencies. While some see rate cuts as an opportunity for cryptos, others warn of a potential correction. Here are some key points to consider:

• A 50 basis point cut could signal economic urgency;
• Risky markets could react by reducing their exposure;
• Bitcoin has already experienced a strong rally due to rate cut expectations.

Craig Shapiro, macro trader, points out that liquidity-hungry markets could push the FED to opt for a more significant cut, but current price levels of risky assets could lead to a correction.

The Fed doesn't want to start with a 50bps cut because frankly, at this point, the economy doesn't need them to panic.

The market wants them to start with 50 and go bigger and faster because the market acts like a petulant child in constant need of "moar" liquidity. I have…

— Craig Shapiro (@ces921) September 6, 2024

The FED might not want to cause premature panic, preferring to avoid too large a first cut. This could delay any substantial reaction in the crypto market.

Despite fears of this decision having a detrimental effect on Bitcoin, some experts believe the FED could, paradoxically, pave the way for Bitcoin to reach $100,000.