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In summary
- Analysts warn that Bitcoin (BTC) could experience a short-term decline amid potential interest rate cuts by the US Federal Reserve (FED).
- According to a report from Bitfinex, the price of Bitcoin has increased 32% since the lows of August 5, but the momentum has waned.
- The report suggests that the Cryptocurrency market could be ripe for a “sell the news” event as rate cuts become imminent, with a significant drop in spot markets.
As the cryptocurrency market anticipates potential interest rate cuts from the US Federal Reserve (FED), analysts are warning that Bitcoin (BTC) could experience a short-term decline, defying conventional wisdom that rate cuts are universally bullish for risk assets.
According to a Sept. 2 report from Bitfinex, Bitcoin prices have surged by as much as 32% since the Aug. 5 lows, with global open interest for BTC/stablecoin perpetual pairs up nearly 30%. However, the size of the Bitcoin price surge has slowed amid cooling price momentum, currently up around 17% from the recent low, reaching the current price of $58,153.
Bitfinex’s report suggests that the cryptocurrency market could be ripe for a “sell the news” event as rate cuts become increasingly imminent. This observation is supported by data showing significant selling in spot markets, especially at the start of the US trading sessions throughout the previous week.
Digging deeper into the data, the report highlights that the Cumulative Volume Delta (CVD) for spot Bitcoin trading pairs on major centralized exchanges has declined by approximately 66% since the daily high on August 26. In contrast, the CVD for Bitcoin perpetual contracts is only down 11%, indicating a stark difference between spot and derivatives markets.
CVD is a key metric that measures the net difference between buying and selling volumes across exchanges, helping traders assess overall market pressure. A declining CVD typically indicates increased selling pressure in the market.
Elaborating further on the report, Bitfinex analysts told Decrypt that they don’t believe the rate cuts will be negative for the market in the long term. However, in the short term, markets have declined on average by around 6% following the last four Fed rate cuts.
Analysts clarified that this short-term decline typically occurs within a few weeks of a rate cut. They noted that while the S&P 500 could see a modest correction, Bitcoin could experience a more significant drop due to its recent underperformance relative to traditional markets.
“This typically happens because short-term buyers and investors who expect the market to perform well (after) rate cuts look for an exit on positive news,” the analysts said, “and similarly, many macro traders view confirmation of rate cuts as a ‘sell the news’ event.”
“These are some of the reasons why historically, rate cuts have been negative in the short term for the market,” the analysts explained, “and it takes a few months (after) rate cuts for liquidity to enter the market, as the Fed intended.”
Additionally, they said that with upcoming rate cuts widely communicated and much more predictable than in previous cycles, they expect less volatility and a shorter “sell the news” event.
Additionally, the report also sheds light on Bitcoin’s historical performance in September, noting that it has traditionally been a volatile month for the cryptocurrency.
Since 2013, Bitcoin has had an average return of -4.78% in September, with a typical peak-to-trough drop of 24.6% since 2014. This historical trend aligns with analysts’ projection of a potential 15-20% drop in Bitcoin prices following a rate cut.
“Assuming BTC price is around $60,000 before interest rates are cut, this would place a potential bottom between lows of $50,000 or mid-$40,000 levels,” the report states.
However, not all market observers share the same level of bearish sentiment.
In a conversation with Decrypt, Matteo Greco, market analyst at Fineqia, commented that rate cuts usually lead to short-term declines, but tend to have positive effects in the long term.
“Initially, they are seen as a ‘sell the news’ event because they typically occur during economic downturns, causing risk assets to underperform,” he said. “However, as markets adjust and expectations are priced in, the benefits of lower interest rates begin to emerge.”
Greco also anticipates a 75-100 basis point interest rate cut by the end of 2024. Therefore, only significant deviations from this expectation should negatively impact markets. For example, a 50 basis point cut at the next Federal Open Market Committee (FOMC) meeting could signal worsening economic conditions and an emergency measure by the Federal Reserve, which could push prices lower in the short term.
Bitfinex’s report notes that market sentiment currently points to a 70% chance of a 25 basis point cut, and a 30% chance of a 50 basis point cut at the September meeting. These expectations, combined with signs of a weakening labor market, evidenced by disappointing non-farm payrolls (NFP) reports and a decline in job openings, reinforce the possibility of imminent rate cuts.
Edited by Andrew Hayward
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