There is a pattern that has quietly played out over these past months, and it is becoming increasingly difficult to overlook. How is it that each time the US Fed cuts interest rate, the crypto market always seems to respond to it with an immediate sell off? This is no longer random, my friends.
This is the third time the Fed has lowered interest rates in 3 months now. They has reduced the range from above 4.25% to 3.50%-3.75%. It happened each time: every time, it led to selling of Bitcoin.
In the first cut, Bitcoin went into a sharp nose-dive on the 17th of September. At that stage, it was a bit puzzling, since cuts are viewed as positive indicators for risk assets. Weeks passed by, and the price climbed back to set a new all-time high.
Then there was October 29: The Fed cut rates once more, and the same reaction followed again. Bitcoin dumped after the announcement and kept falling until finding support at $83,000. The markets sold the news again.
Now, we’ve had a third cut, and the reaction is once again one of weakness. This is an important question. If rate cuts are supposed to be positive, then what is behind the continual fall of Bitcoin after these cuts?
One of the possible answers is that Bitcoin is often misunderstood. It is often referred to as a hedge against inflation, but the truth is that it is more of a commodity. It does not appreciate in value simply because of the presence of inflation. It is the demand that makes it appreciate, not the printing of money. Inflation and quantitative easing are, at best, insignificant in the long-term rate of appreciation of this investment.
The digital currency is no different from other commodities in the sense that it is driven by anticipation of growth, demand, and economic factors. A reduction in rates is not necessarily an indicators of strength. A number of times, it is reacting to weaker economic signals or the threat of recession. If markets feel that cuts are aimed at warding off recession, then commodities become very cautious.
This goes a long way in understanding the sell-offs that occur in the short term. When there are looming recession chances, then the prospects of demand tend to decline, which shapes the commodity markets accordingly. Bitcoin is no exception to this either. It is digital, but it still operates in the macro markets.
Second, it is the positioning issue. There are times when the markets have priced in a cut before the announcement is made officially. This is because once it is public knowledge, some of the traders involved look to make some profit, causing a sell-off before the start of a subsequent stage of price discovery.
It is important to note that these are reactions, not break downs. Following the September cut, Bitcoin rebounded and went on to gain more. Following the October drop, support levels were reached, and the markets stabilized. It seems that rate cuts actually do not necessarily erase the trend.
The lesson here is that rate cuts are not fuel for Bitcoin on day one. More often than not, a rate cut is a warning sign, not a victory dance. It is easier to make sense of these scenarios if you understand that Bitcoin is a commodity and not just a hedge. Sometimes, the dump is not proof that the message is wrong, but that the markets are behaving as markets should.
Posted Using INLEO