Bitcoin Price Declines as Fed Rate Cuts Loom: Quiet Before the Potential Storm?
Bitcoin’s price saw a 2.7% decline in the last 24 hours, coinciding with the US Federal Reserve’s potential initiation of a rate-cut cycle. The cryptocurrency, which had been hovering around $60,000 over the weekend, experienced this drop in anticipation of the Fed’s expected rate cuts scheduled for this week. This movement aligns with predictions made by former BitMEX exchange CEO, Arthur Hayes.
If the Fed proceeds with rate cuts this week, it will mark the first time in four years that interest rates have been reduced to stimulate the economy amid easing inflation. According to data from Polymarkets, there is a 57% chance that the Fed will cut rates by 50 basis points (bps), while the odds for a 25 bps cut stand at 42% at present.
Following the extensive money printing due to the COVID-19 pandemic in 2020, the Fed faced the challenge of curbing surging inflation caused by supply chain disruptions and currency devaluation. As a response, the Fed began a rate-hike cycle in March 2022, with the last rate hike occurring in July 2023.
Traditionally, rate cuts are viewed positively as they reduce borrowing costs for businesses, encouraging risk-taking and expansion. This typically leads to increased investment in risk assets like stocks and cryptocurrencies, driving their prices higher. However, experts believe that the impact of rate cuts on risk assets might not follow the usual pattern this time.
During periods of economic uncertainty and high unemployment, rate cuts could signal to investors that the Fed lacks confidence in the economy’s health, potentially hinting at an impending recession. Additionally, rate cuts could trigger a ‘buy the rumor, sell the news’ scenario, where investors anticipate easier monetary conditions before the official rate cut and then sell off assets to secure profits.
Concerns about persistent inflation could also contribute to the decline in risk assets prior to expected rate cuts. Although the headline Consumer Price Index (CPI) for August 2024 was lower than expected, core CPI slightly exceeded forecasts, indicating ongoing challenges in combating inflation.
Looking ahead, another significant event that could impact the future price trajectory of Bitcoin and other cryptocurrencies is the upcoming US Presidential Elections. The outcome of the elections, particularly whether Donald Trump or Kamala Harris emerges victorious, could have varying effects on digital asset prices. A report by Bernstein suggested that a Trump win could potentially drive Bitcoin’s price to $90,000 in Q4 2024, while a Harris victory might lead to a drop in Bitcoin’s price to around $30,000.
As of now, Bitcoin is trading at $58,498, reflecting a 2.7% decrease within the past 24 hours. The crypto market remains dynamic, with various factors influencing price movements and investor sentiment.
