Fed’s Potential Rate Cut Sparks Concern for Bitcoin, Says 10x Research

Key Insights:

• A 50 bps Fed rate cut could signal deeper economic concerns, potentially impacting Bitcoin and other risk assets, according to 10x Research.
• Traders see a less than 30% chance of a 50 basis point cut, but any aggressive move could create uncertainty for Bitcoin investors.
• Bitcoin’s 2023 rally may slow if markets react negatively to a Fed rate cut, raising questions about cryptocurrency liquidity-driven gains.

The Federal Reserve is expected to begin cutting interest rates next week, potentially affecting various financial markets. According to a report by 10x Research, a 50 basis point (bps) rate cut could send mixed signals to investors, particularly in risk assets such as bitcoin.

Market experts, including Markus Thielen from 10x Research, have voiced concerns that an aggressive rate cut could indicate underlying economic issues, creating uncertainty for markets that rely on liquidity, like cryptocurrencies.

50 Basis Point Cut Could Signal Economic Worries

Central banks, including the Federal Reserve, typically adjust interest rates in increments of 25 basis points. However, a larger cut of 50 basis points is sometimes chosen in response to more urgent economic conditions. Traders are currently pricing in a less than 30% chance of such a move next week, according to the Chicago Mercantile Exchange’s (CME) FedWatch tool.

10x Research suggests that a 50 bps cut could indicate the Fed is concerned about slowing economic growth. “While a 50 basis point cut by the Fed might signal deeper concerns to the markets, the Fed’s primary focus will be mitigating economic risks rather than managing market reactions,” noted Markus Thielen in a client update. He previously predicted bitcoin’s rally to $70,000 in the first quarter of 2023.

If the Fed opts for a larger-than-expected cut, it could signal a shift in the economic outlook, prompting investors to reconsider their exposure to risk assets like bitcoin.

Jobs Data Sets the Stage for Rate Cuts

The recent U.S. jobs report has set the foundation for the Fed’s upcoming rate decision, expected on September 18. A weaker labor market could push the Fed toward easing monetary policy sooner rather than later. Some analysts have pointed out that the Fed may have missed earlier signs of labor market weakness.

According to Thielen, “The probability of a 50 basis point cut is only 29%, contrasting our view and the prevailing consensus.” His view reflects growing concerns that the central bank could be acting too slowly in addressing potential economic slowdown.

Other experts agree that a 50 bps cut may not be necessary at this point, with some expressing concerns that such a move could send panic signals to the market. “The Fed doesn’t want to start with a 50 bps cut because frankly, at this point, the economy doesn’t need them to panic,” said macro trader Craig Shapiro on social media platform X.

Bitcoin and Risk Assets at a Crossroads

Bitcoin and other risk assets have benefitted from the anticipation of rate cuts throughout 2023, with bitcoin climbing from $20,000 in January. However, past data suggests that the beginning of a rate-cutting cycle doesn’t always lead to an immediate boost in asset prices.

Shapiro has noted that markets addicted to liquidity could react negatively if the Fed opts for a more cautious approach. He added that “Risk assets will correct until the Fed capitulates and gives it what it wants.” Investors may wait for clearer signs of where the Fed stands before making any significant moves.

Bitcoin’s recent uptrend has been largely driven by expectations of an easing monetary policy. The question remains whether these expectations have already been priced into the market or if a more substantial cut would be needed to sustain the rally.

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