Main Points:
- The potential impact of a 0.5% rate cut by the Federal Reserve on Bitcoin and risk assets is discussed by 10x Research.
- Traders are predicting less than a 30% chance of a rate cut next week.
- A larger-than-usual rate cut could signal deeper concerns about the economy rather than relief.
- Market reactions are anticipated, particularly concerning Bitcoin’s exposure to risk assets.
The Fed’s Rate Cut and its Potential Effect on Bitcoin
As the Federal Reserve (Fed) considers a significant interest rate reduction, 10x Research has raised concerns about how this decision could affect Bitcoin (BTC) and other risk assets. A potential 50 basis point (bps) rate cut would represent a bolder move than the usual 25bps adjustment, signaling not just relief but potentially reflecting greater economic fears. With traders predicting a less than 30% chance of this happening, the market remains on edge, awaiting next week’s announcement.
The Significance of the Fed’s Rate Cut
Historically, the Fed’s rate adjustments are measured in basis points (bps), where 100 bps equals 1%. Central banks typically move rates in 25bps increments, but larger changes indicate heightened urgency. For instance, during the 2022 tightening cycle, the Fed implemented multiple 50bps and 75bps hikes to curb inflation, triggering risk aversion across financial markets.
If the Fed implements a 50bps rate cut next week, it could signal growing economic concerns or a delayed response to an impending recession. This would likely prompt investors to reduce exposure to risk assets, including Bitcoin, which often correlates with risk sentiment.
10x Research’s Perspective on the Rate Cut’s Market Impact
Markus Thielen, the founder of 10x Research, noted that a 50bps cut could indicate deeper concerns in the market, but the Fed’s focus would remain on mitigating economic risks rather than solely managing market reactions. Thielen accurately predicted Bitcoin’s rise to $70,000 in the first quarter, and he now cautions that aggressive rate cuts could weigh heavily on risk assets.
The CME’s FedWatch tool currently shows a nearly 30% chance that the Fed will lower rates to a 4.75%-5% range next week, a decision that could have significant implications for Bitcoin and other cryptocurrencies. Thielen also pointed out that the labor market’s perceived weakness has led some to believe that the Fed is lagging behind in its response.
Market Reactions: Bitcoin and Risk Assets Under Pressure
Craig Shapiro, a macro trader, shared on X (formerly Twitter) that a 50bps rate cut could trigger adjustments in risk assets, such as Bitcoin and stocks, as investors recalibrate expectations. He noted that liquidity-dependent markets might initially welcome the cut, but they would expect further easing from the Fed in the coming months.
Shapiro warned that the so-called “Fed put” might not provide the same level of support as it did in the past, due to the economic environment and high asset prices, including stocks and credit spreads. This could lead to a significant repricing of risk assets, with Bitcoin particularly vulnerable to such shifts.
Historical Context: Rate Cuts and Bitcoin’s Performance
Past data show that the start of a rate-cut cycle doesn’t always lead to asset price stimulation. In early 2023, Bitcoin saw a rise from $20,000, largely driven by expectations of a Fed rate cut. However, with rate cuts now possibly priced in, there is uncertainty about whether Bitcoin can maintain its upward momentum in the face of a more aggressive easing policy.
The Future of Bitcoin in a Shifting Economic Landscape
While a 0.5% rate cut by the Fed could relieve certain parts of the economy, it also raises concerns about the broader economic outlook. For Bitcoin and other risk assets, this signals potential volatility ahead. The coming weeks will be critical in determining how the Fed’s decisions will shape market sentiment and whether cryptocurrencies like Bitcoin can weather the storm.
