Bitcoin Price May Decline Further Despite Federal Reserve Rate Reductions, Analysts Suggest

As the cryptocurrency market awaits potential interest rate cuts from the Federal Reserve, experts are warning that Bitcoin (BTC) could face a short-term decline, challenging the usual belief that rate cuts are always positive for risk assets.

A recent report from Bitfinex revealed that Bitcoin prices have surged by up to 32% since hitting lows on August 5. Global open interest for BTC/stablecoin pairs has also increased by nearly 30%. Despite this, the size of the price jump has lessened, currently standing at around 17% from the recent low, with the current price at $58,153.

The report indicates that the cryptocurrency market might be gearing up for a “sell the news” scenario as rate cuts become more certain. Data shows significant selling in spot markets, especially at the beginning of U.S. trading sessions in the past week.

Analyzing the data further, the report points out that the Cumulative Volume Delta (CVD) for spot Bitcoin trading pairs on major centralized exchanges has dropped by approximately 66% since the daily high on August 26. In contrast, the CVD for Bitcoin perpetuals has only decreased by 11%, highlighting a notable difference between spot and derivatives markets.

CVD is a crucial metric that measures the net difference between buying and selling volumes on exchanges, offering insight into overall market pressure. A declining CVD typically indicates stronger selling pressure.

Bitfinex analysts shared with Decrypt that while they don’t view rate cuts as negative for the market in the long term, historical data suggests a short-term decline of about 6% following the last four Fed rate cuts. This decline usually occurs within a few weeks of the rate cut announcement. They noted that while the S&P 500 might see a modest correction, Bitcoin could experience a more significant drop due to recent underperformance compared to traditional markets.

The analysts explained that short-term buyers and investors often exit the market after positive news like rate cuts, leading to a “sell the news” event. They anticipate lesser volatility and a shorter impact on Bitcoin this time due to the predictability of the forthcoming rate cuts.

Looking at historical data, the report highlighted Bitcoin’s performance in September, noting it as a volatile month for the cryptocurrency. Since 2013, Bitcoin has shown an average return of -4.78% in September, with a peak-to-trough decline of 24.6% since 2014. The analysts projected a potential 15-20% drop in Bitcoin prices post a rate cut.

While some experts share a bearish sentiment, others like Matteo Greco, Market Analyst at Fineqia, believe that rate cuts, though causing short-term declines, generally have positive long-term effects. Greco emphasized that markets tend to adjust to lower interest rates over time, leading to positive outcomes.

The Bitfinex report indicated a 70% probability of a 25 basis point rate cut and a 30% chance of a 50 basis point cut at the upcoming September meeting. These expectations, alongside weakening labor market indicators, support the case for imminent rate cuts.

In conclusion, while short-term market fluctuations are anticipated following rate cuts, the long-term impact on Bitcoin and other assets remains to be seen.