If you’ve been keeping an eye on Bitcoin lately, you might have noticed something unusual: instead of getting a boost from the Federal Reserve’s recent hint at interest rate cuts, Bitcoin’s price has actually dropped. This might seem puzzling at first, especially since rate cuts usually provide a lift to risk assets like Bitcoin. So, what’s going on?
Rate Cuts Aren’t Helping Bitcoin—Here’s Why
Let’s break down the issue. Normally, when the Fed cuts rates, assets like Bitcoin tend to benefit because lower rates often push investors toward riskier investments in search of higher returns. However, this time, things are playing out differently. According to Arthur Hayes, co-founder and former CEO of BitMEX, the Federal Reserve’s Reverse Repo Facility (RRP) is a major reason why.
The RRP allows market participants to park their U.S. dollars at the Fed and earn a 5.3% interest rate. That’s pretty appealing, especially when compared to the current yields on Treasury bonds, which are lower. Even though Treasury rates are dropping due to the Fed’s cuts, the RRP’s 5.3% rate is keeping money locked up there, rather than flowing into other assets like Bitcoin.
My theory on why Fed rate cuts aren't going to plan.
Since JAYPOW annc Sept rate cut at J-Hole, $BTC down 10%, y? I thot rate cuts were good for risk assets.
RRP pays 5.3% no T-bill under 1-yr maturity pays more. MMF will move money from T-bill -> RRP which is $ liq -ve.
Since…
— Arthur Hayes (@CryptoHayes) September 2, 2024
What We’re Seeing in the Market
We’re already seeing this scenario unfold. After Fed Chair Jerome Powell announced the rate cuts during his Jackson Hole speech on August 23, Bitcoin’s price took a dive instead of rallying. Meanwhile, capital has been moving out of Treasury bonds, shown in red, and into the RRP facility, shown in blue. Since Powell’s speech, a staggering $120 billion has flowed into the RRP facility.
This shift is keeping capital out of the broader market, which includes Bitcoin. In other words, the money that could have gone into boosting BTC is instead sitting comfortably at the Fed, earning that steady 5.3%.
Why This Matters for Bitcoin
So, why is this bearish for Bitcoin? Simply put, the funds parked in the RRP are not flowing into riskier assets. For Bitcoin, that means less buying pressure and, as a result, lower prices. In a different scenario—say, if Treasury and RRP rates were much closer to zero—investors might start looking for riskier options like Bitcoin. But right now, the 5.3% rate on the RRP is just too attractive for many, especially given the current economic uncertainties.
Did the Money Printers Restart Yet?
Before the weekend, Hayes mentioned that the Federal Reserve was preparing to restart the money printers, which could significantly impact Bitcoin. He believed that the upcoming rate cuts from the U.S. central bank might drive Bitcoin prices higher, even if other markets respond differently. However, it seems this hasn’t happened yet.
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