It now seems quite certain that the Fed will cut rates at the end of the month.
On Polymarket, a 25 basis point cut is considered likely at 92%, so much so that the markets have most likely almost entirely priced it in.
Despite this, Bitcoin seems to be in slight difficulty in recent days.
The Fed’s Rate Cuts
The Fed has kept interest rates unchanged from July 2023 to August 2024.
The curious thing is that they were at their highest in the last 20 years, but due to ongoing inflation, they couldn’t cut them.
In September of last year, it made a first cut, followed by another in November and a third in December. However, it then stopped.
Last month began a new possible sequence of cuts, also because even though inflation is still well above its target, the labor market has shown signs of weakening.
The one expected at the end of October would therefore be only the second cut of the year, and the fifth in the last three years.
However, while the end-of-month cut seems already priced in by the markets, the hypothetical December one is not yet.
On Polymarket, another 25 basis point cut in December is considered likely at 76%. The real question is probably this, because the end of October cut is now almost certain.
The Impact on Bitcoin
The price of Bitcoin has already priced in the rate cut at the end of October for weeks.
What is not yet fully priced in is that of December.
In particular, at the end of September, the probabilities of a 25 basis point rate cut by the end of the year had decreased from 73% to 64%, and this reduction had a negative impact on the price of Bitcoin.
Then, however, at the beginning of October, they rose to 74%, thus initiating the small rally that led BTC to record new all-time highs above $126,000.
Starting from October 7, however, there was a new decline, of small magnitude, with a drop to a 71% probability. In fact, that very day marked the end of Bitcoin’s early month rally.
Last Friday, October 10, the probabilities returned to 74%, but the price of Bitcoin did not rise again. Now they have even increased to 76%.
The Challenges of Bitcoin
The point is that on Friday the 10th, another dynamic came into play, not connected to the Fed’s interest rate cut.
In fact, the Bitcoin rally that started on the first of October was actually excessive, leading to the inflation of a mini-mini-bubble that then burst precisely on Friday the 10th. The decline in recent days is still a consequence of that burst.
It should not be forgotten that September closed at around $114,000, which is also the price reached yesterday.
In the meantime, the probabilities of a Fed rate cut in December have not changed much, returning more or less to the levels prior to the decline in the last days of September, but a mini-mini-bubble has burst, inflated by excessive enthusiasm.
The current price of BTC, however, is higher than that of September 28, therefore the difficulties are evident only in the short term, because they disappear in the medium term.
Interest Rates and Bitcoin
The Fed’s interest rates affect the interest rates paid on loans issued by U.S. banks.
They also indicate on the yield of US government bonds, because the higher the rates, the higher the interest (i.e., the yields), and the greater the demand for such bonds.
A rate cut would reduce the interest paid on those securities, and therefore their yields, generating sales. If such sales were made by foreign investors, the dollars received from the sale of US government bonds would in turn be sold to purchase local currency, and this would cause the Dollar Index to fall.
The price trend of Bitcoin tends to be inversely correlated with the Dollar Index in the medium term, so a rate cut should lower the Dollar Index and raise Bitcoin. However, this is never the only dynamic at play in the Bitcoin market.
For example, starting from the first of October, a mini-mini-bubble was added to all this, completely unjustified by the fundamentals, which then burst also and especially due to a further increase in the Dollar Index.
Even if the forecasts on rate cuts remain unchanged, the price of BTC could still end up moving due to other ongoing dynamics.