August is almost coming to an end and eyes are on Bitcoin. Its performance has clearly not been as interesting as it was in July. This is largely due to the lack of proper catalysts to fuel heavy liquidity injection. There is one particularly major event in September that may support a bullish outcome that could lead to new all-time highs.
Interest rates have a clear impact on Bitcoin and other risk-on assets. Rate hikes have historically had a negative impact on BTC’s price action. For example, the end of the last bull run occurred when the Federal reserve embarked on an aggressive rate hike journey. This resulted in liquidity being sucked out of the markets.
Interest rate cuts have an opposite impact. There were no rate hikes in July, but political hype propped up Bitcoin’s price action. The last FED announcement kept interest rates steady for this month but there is a high probability of a significant rate cut in September.
SUMMARY OF FED MEETING MINUTES (8/21/24):
1. Majority of Fed members believe it is appropriate to lower rates at next meeting if data remains constructive
2. Recent data has enhanced confidence over inflation
3. Several participants considered a 25 bps rate cut in July
— The Kobeissi Letter (@KobeissiLetter) August 21, 2024
Lower rates could bring about a strong liquidity influx, potentially enough to put Bitcoin back on a strong bullish trajectory. Such an outcome could lead to price discovery, hence potentially pushing Bitcoin to new all-time highs within week or months.
The looming recession raises uncertainty around Bitcoin
One of the biggest questions that many Bitcoin holders have is how it will perform during a recession. All signs currently indicate that a recession is coming if it is not here already. One would expect BTC to rally during a recession. After all, it was invented as a recession-proof asset, as a reaction to the financial crisis of 2008.
Recent observations signaled that Bitcoin is diverging from its correlation with the stock market. This was observed recently as stocks continued surging while BTC struggled to stay above $60,000. Also evident in the divergence between Bitcoin and the NASDAQ. This divergence may suggest that Bitcoin might be isolated from a recession-induced crash.
Asset prices tend to fall due to the lack of demand during a recession. Also, people tend to hoard cash in such instances hence exiting risk-on assets. This is already happening as Berkshire Hathaway reportedly sold off a large sum of shares and now holds a $189 billion cash position.
Unfortunately, the reality may turn out much different. This is because of the high level of leverage that still exists in the market, courtesy of the Japanese Yen carry trade. The latter is the main reason why Bitcoin and other assets crashed at the start of August.
There has been a lot of speculation lately over the size of the carry trade. While the actual numbers are not easy to quantify, it has been going on for years. Low interest rates in Japan attracted heavy borrowing domestically and internationally, including from institutions and governments.
The Bank of Japan recently stated that it will not hike rates further, causing a pause of the massive selloffs that we observed earlier this month. This was due to the JPY carry trade unwind. While this temporary relief may have appeased the market, there are concerns that the unwind is not yet over, and that its impact could be more severe further down the road.
As noted earlier, lower interest rates might be coming and this will further lower the profit margins for those still in the JPY carry trade. This could technically trigger more sell pressure, potentially leading to more asset selloffs as carry trade profit margins get squeezed. Bitcoin is still highly leveraged. The latest crash underscores this fact and the impact was clear as leveraged traders closed their position, resulting in a dip in the estimated leverage ratio earlier this month.
Summary
Although Bitcoin has been losing its correlation to the stock market, it may still be heavily exposed to the Yen carry trade. Another major fallout would thus drag Bitcoin down. It is essential to keep a close eye on FED policy changes in the coming months.
Remember, quantitative tightening removes liquidity from the market while quantitative easing does the opposite. The FED has a limited arsenal for steering the economy in the right direction, meaning it will eventually result to liquidity injections to stimulate the economy. These factors may offer potential insights into how Bitcoin might behave in the coming months. However, there might also be other hidden forces at play, influencing BTC’s performance.
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