The Fed's Rate Cut Is Not A Good Sign For Bitcoin, Here's Why!

As the U.S. Federal Reserve prepares to lower its rates, Bitcoin is struggling to benefit from it. Arthur Hayes, former CEO of BitMEX, provides an enlightening analysis of this apparent paradox that intrigues investors.

The Fed rate cut, a mirage for Bitcoin according to Arthur Hayes

The U.S. Federal Reserve is moving towards a rate cut, a decision usually favorable for risky assets like Bitcoin. However, Arthur Hayes, a leading figure in the crypto sector, tempers this enthusiasm with a sharp analysis.

At the heart of his reflection are reverse repurchase agreements (RRP), a financial instrument often overlooked. These RRPs currently offer an attractive yield of 5.3%, outperforming U.S. Treasury bonds which cap at 4.38%.

This yield disparity creates an unexpected domino effect. Major money market funds are gradually pivoting from Treasury bonds to the more lucrative RRPs. 

The immediate consequence: liquidity scarcity in risky assets, including Bitcoin. Hayes reveals that a massive inflow of $120 billion has moved into RRPs since the announcement of a probable rate cut in September.

An enlightening metaphor from the X account ‘ELI5 de TLDR’ compares RRPs to an ‘overnight parking lot’ for financial institutions. Capital gets locked up in these both safe and profitable products, to the detriment of the real economy and financial markets, which are deprived of these flows.

A complex macroeconomic context for crypto

The current situation defies traditional expectations. Generally, a rate cut stimulates borrowing and spending, injecting liquidity into the economy. Moreover, a weakened dollar tends to enhance Bitcoin’s attractiveness.

Yet, since Jerome Powell’s speech at Jackson Hole on August 23, announcing a probable rate cut, Bitcoin has dropped by 10%, from $64,000 to $57,400. This market reaction puzzles analysts.

The CME Fed Watch tool predicts a 69% chance of a 25 basis point cut, and a 31% chance for a 50-point reduction. A more significant cut could potentially trigger a stronger market reaction and further stimulate economic activity.

Hayes’ theory offers a new perspective on the complex relationship between monetary policy and Bitcoin. It highlights the importance of considering all financial mechanisms to anticipate Bitcoin’s movements in a constantly evolving economic environment.