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Bitcoin ekes back above $10,000 as Fed announces first rate cuts since GFC

Posted: 1 August 2019 11:52 am
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The rate cut announcement sent a simultaneous, identical shudder through Bitcoin, gold and stock prices.

In a day of breathless trading, Bitcoin successfully edged its way back above the arbitrary, but psychologically-impactful, $10,000 mark, coinciding with US Federal Reserve Chairman Jerome Powell's announcement of a 0.25% interest rate cut; the first rate cut since the global financial crisis, and Bitcoin's creation, in 2008.

But are Bitcoin's prices really responding directly to the rate cuts? Absolutely.

As we can see, Bitcoin prices (candles), gold prices (orange line) and the stock markets (S&P 500 in the blue line) actually mirrored each other uncannily amidst the rate cut announcements.

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BTCUSD chart by TradingView

It's not often that you see Bitcoin prices correlate so tightly with other assets, and respond so directly to things happening in "the real world" of finance.

Correlations

On the whole, central bank interest rates affect how much it costs to borrow money, and how much is earned by safe cash investments such as bank savings accounts. It generally has the effect of putting more money into the economy. So, typically, when the Fed cuts interest rates it bolsters the markets and sees people pumping more money into things like stocks and gold.

Common wisdom holds that rate cuts are good for the markets, but as we've seen here, everything – stock markets, gold and Bitcoin – shared a dip on the rate cuts.

Gold analysts are attributing the dip to disappointment that the rate cuts weren't more aggressive. It's reasonable to believe that Bitcoin prices dipped for the same reason.

And stock markets might also have reason to be concerned, because despite all the common economic wisdom loudly saying rate cuts are good for the markets, history says, even more loudly, that rate cuts bode poorly for stock markets. The 0.50% cut in September 2007 came just three weeks before markets peaked and then plummeted into the global financial crisis (GFC). And the same thing happened a few years before that, with rate cuts accompanying the bursting of the dot-com bubble.

"The idea that the Fed cuts rates and that gives a boost to the economy, which boosts earnings, which then boosts stock prices—that line of thinking just hasn't worked for two decades," says Jeff DeMaso, Adviser Investments director of research, quoted by Forbes.

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As you can see, there's not a lot of room left to cut rates at this point, and the impact of the GFC lingers. Where do you go from here? Well, the International Monetary Fund (IMF) is pondering the merits of deep negative rates (coming to a Central Bank near you!) to fight recessions.

The Fed, in its announcements of the rate cuts, voiced a general willingness to continue sinking rates as needed going forwards.

What do interest rates have to do with Bitcoin?

Coming back in the world of imaginary money, interest rates have nothing to do with Bitcoin. That's the point.

It's not entirely insulated from the Fed, as we can see from its price movements today, but it's further from the US dollar than other markets. To cut interest rates, the Fed will be increasing the supply of US dollars. By contrast, Bitcoin is looking forward to a reduction in its inflation rates.

On the whole, the main reason people are looking so eagerly at Bitcoin in coming years is because of its growing reputation as a high-performing alternative asset class. Institutional involvement in the stuff only serves to cement this reputation.

If and when the world rolls into its next period of massive rate cuts and general economic messiness, and the US dollar faces devaluation and the stock markets crash, Bitcoin will be an intriguing asset, as a historically high-performing asset which remains largely uncorrelated with the rest of the markets, that can also be used directly as money.

That said...

Gold ownership rates in the USA are less than 10%, while Bitcoin ownership rates are even lower, and despite all the major advances of recent years it remains fairly complicated, and not especially user-friendly on the whole. Plus, the idea of it serving as a mainstream payment mechanism is ludicrous. Neither Bitcoin's main chain nor the Lightning Network are currently able to handle serious large-scale use.

Plus, despite the clear synchronisation between Bitcoin, gold and stock market reactions to the rate cuts, Bitcoin is volatile enough that by itself, it's not even a footnote in Bitcoin's price history.

Any impact from today's developments will have to be felt over the course of years, not hours.

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BTCUSD chart by TradingView



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Disclosure: The author holds BNB, BTC at the time of writing.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade. Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

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