By Michael Scott
Analysts warn more pain lies ahead for Bitcoin despite the bullish prediction that interest rate cuts by the Fed will bolster risk asset prices.
The crypto market anticipates the interest rate cuts by the US Federal Reserve will stimulate upside momentum. Analysts caution that Bitcoin (BTC) could experience a short-term tumble. The decline will challenge the conventional wisdom that interest rate cuts are universally catalysts for bullish runs for risk assets.
Bitcoin Short-Term Decline
The September 2 disclosure by Bitfinex acknowledged that Bitcoin prices are up by 32% since plunging to lows during the global market meltdown witnessed on August 5. Analysts note that the BTC/stablecoin perpetual pairs rose nearly 30%.
Nevertheless, the jump with a short-term decline. Such aligns with the typical decline averaging 6% in the previous rate cuts.
The Bitfinex analysts observed that the short-term decline is a mainstay within a few weeks of the Fed announcing rate cuts. They indicated that the S&P may encounter a modest correction. Bitcoin could see a significant drop owing to the recent underperformance that trails the traditional markets. In BTC, the price is eroding fast as the price momentum cools. The price is barely up by 17% at the exchange of $55,162.42, per CoinGecko data.
Despite the clear hint that the Federal Reserve will cut interest rates, Bitfinex analysts predict that the crypto market is destined for the ‘sell the news’ event. The observation aligns with the previous week’s market data, illustrating mounting selling pressure within the spot markets as trading sessions started in the US.
The report spotlights that the Cumulative Volume Delta (CVD) nosedived by 66% for the spot BTC trading pairs across the significant centralized exchanges since the August 26 high.
The CVD tracks the net difference between the purchase and sale volumes executed on exchanges. A decline in CVD typically signals more substantial selling pressure.
The Bitifinex analysts clarified that they do not consider the rate cuts by the Fed to be harmful to the crypto in the long term. Nonetheless, they elaborated that Bitcoin would lead altcoins.
The analysts elaborated the decline is imminent since short-term buyers and investors often anticipate the market to recover following the rate cuts and will exit upon the positive announcement. Also, most macro traders consider the rate cuts confirmation by the fed as the ‘sell the news’ event.”
Historical Decline in September
The report considers the above as ground for the historical downside in the market following the rate cuts. The analysts add that it takes several months following the dovish move by the Fed for the market to experience liquidity inflow.
The analysts observed that lesser volatility is likely with the forthcoming cuts already widely communicated and more predictable than in the past. Such could lead to a shorter sell-the-news event.
The Bitfinex report weighs the historical performance of lead crypto by market value in September. The analysts note that traditionally, September is a volatile period for the crypto market.
The report acknowledges that BTC has registered a -4.78% decline in average return since 2013 during September. Bitcoin has had a peak-to-trough decline that has typically been estimated at 24.6% since 2014. The historical trend informs their projection of a 15-20% slide in Bitcoin prices post the rate cut.
The report states that with the assumed price of $60,000 before the interest rate cut, the potential bottom would emerge between $50,000 and mid-40,000 levels.
Some market observers harbor contrasting sentiments to the Bitfinex bearish prediction. Fineqia market analyst Matteo Greco considers that while short-term declines have become the norm, such quickly transforms into positive outcomes in the long run.
The Fineqia analyst clarifies that though seen as a ‘sell the news’ event, such is inevitable during the economic slowdown. Often, it plunges the risk assets into underperformance. The market ultimately adjusts as traders price in expectations to reveal the benefits attributed to the lower interest rates.
Greco iterates that the market anticipates 75-100bps cuts by the end of Q4; thus, only substantial devitations from present anticipation could cause a negative impact. The analyst cautions against the Fed announcing a 50bps cut at the forthcoming Federal Open Market Committee (FOMC) meeting. Such could indicate an emergency move suggestive of worsening economic conditions that could plunge prices in the short term.
The Bitfinex recent report indicates the prevailing market sentiment signals a 70% likelihood of the Fed announcing a 25 basis point rate cut. The 50 basis point cut stands a meager 30% chance during the September meeting. Such projections and weak labor market data reinforce the ground for the imminent rate cuts.