Bitcoin may see short-term decline despite upcoming rate cuts
As the cryptocurrency market anticipated potential Federal Reserve interest rate cuts, analysts cautioned that Bitcoin (CRYPTO:BTC) might experience a short-term decline, challenging the conventional wisdom that rate cuts are always bullish for risk assets.
According to a September 2 report by Bitfinex, Bitcoin's price surged by as much as 32% since the August 5 lows, with global open interest for BTC/stablecoin perpetual pairs increasing by nearly 30%.
However, Bitcoin's upward momentum has slowed, with its price up about 17% from its recent low, “currently around $58,153” at the time of reporting on September 2.
The report suggested that the market might be set for a "sell the news" event as rate cuts became more certain, backed by data showing significant selling in spot markets, especially at the start of U.S. trading sessions.
The report further highlighted that the Cumulative Volume Delta (CVD) for spot Bitcoin trading pairs on major centralized exchanges had decreased by approximately 66% since the August 26 daily high.
In contrast, the CVD for Bitcoin perpetuals dropped only 11%, indicating a clear difference between spot and derivatives markets.
Bitfinex analysts explained that while rate cuts are generally not negative for markets in the long term, they often lead to short-term declines.
“Markets have declined by an average of about 6% following the last four Fed rate cuts,” the analysts noted.
This decline typically happens within a few weeks after the rate cuts, and it could affect Bitcoin more significantly due to its recent underperformance compared to traditional markets.
The report also noted that historically, rate cuts have been “short-term negative for the market” as they trigger a "sell the news" response.
Analysts emphasized that with the forthcoming rate cuts being more predictable than in previous cycles, they expect “lesser volatility and a shorter ‘sell the news’ event.”
According to Bitfinex's data, Bitcoin's historical performance in September has been notably volatile, with an average return of -4.78% since 2013.
The analysts projected a possible 15-20% drop in Bitcoin prices following a rate cut, aligning with the typical peak-to-trough decline of 24.6% seen since 2014.
Additionally, Matteo Greco, a Market Analyst at Fineqia, told Decrypt that while rate cuts may lead to short-term declines, they tend to be positive in the long run.
“Initially, they are seen as a 'sell the news' event also because they typically occur during economic slowdowns, causing risk assets to underperform,” he said.
However, Greco added that as markets adjust and expectations are priced in, the benefits of lower interest rates start to emerge.
The Bitfinex report indicated that market sentiment on September 2 pointed to a 70% probability of a 25 basis point rate cut and a 30% chance of a 50 basis point cut at the upcoming Federal Open Market Committee (FOMC) meeting.
These expectations, along with signs of a weakening labor market, such as underwhelming non-farm payroll reports and declining job openings, supported the case for imminent rate cuts.
At the time of writing, the Bitcoin (BTC) price was $58,004.31.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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