Arthur Hayes, the co-founder and former CEO of BitMEX and current Chief Investment Officer at Maelstrom, recently shared insights on why anticipated interest rate cuts by the U.S. Federal Reserve might not bolster Bitcoin prices as expected.
During his speech at Jackson Hole on August 23, Federal Reserve Chair Jerome Powell nearly confirmed a rate cut for September. However, despite this, Bitcoin prices have not shown the positive response many anticipated. After the announcement, Bitcoin’s price initially spiked to $64,000 but then dropped by 10% to $57,400 by September 2. As of September 3, the price had slightly recovered to $59,238.
The Role of Reverse Repurchase Agreements (RRPs)
Hayes pointed to the role of reverse repurchase agreements (RRPs) in this dynamic. RRPs, which involve the sale of securities with an agreement to repurchase them at a higher price on a future date, currently offer a 5.3% interest rate. This rate is significantly higher than the yields from Treasury bills, which stand at 4.38%.
This disparity has led large money market funds to shift their capital from Treasury bills to RRPs, reducing the amount of money available for riskier investments like cryptocurrencies. The “ELI5 of TLDR” account on X further explained that RRPs serve as a sort of overnight parking for big banks and money managers, where they can earn higher returns compared to other safe investments, thereby keeping their capital out of the broader economy.
Impact of Fed’s Probable Rate Cut
Since the Fed hinted at the probable rate cut in September, an additional $120 billion has flowed into RRPs. This movement contradicts the general assumption that lower interest rates benefit high-risk assets like Bitcoin. Typically, lower interest rates are believed to encourage borrowing and spending, which increases liquidity in the market and diminishes the appeal of safer, interest-bearing accounts, potentially strengthening Bitcoin against a weaker dollar.
According to the CME Fed Watch tool, there is a 69% probability of a 25 basis point cut and a 31% chance of a 50 basis point cut at the Fed’s meeting on September 18. A more substantial rate cut could indicate a more aggressive approach by the Fed, potentially leading to a stronger market reaction and a significant boost to economic activity.
| Date | Event | Bitcoin Price Reaction |
|---|---|---|
| Aug 23 | Powell’s Jackson Hole Speech | Spike to $64,000 |
| Sept 2 | Post-Speech Market Adjustment | Drop to $57,400 |
| Sept 3 | Slight Recovery | Rises to $59,238 |
| Sept 18 | Upcoming Fed Meeting | Anticipated Volatility |
Arthur Hayes’ analysis provides a nuanced view of the interplay between Federal Reserve policy, market instruments like RRPs, and the cryptocurrency market. While conventional wisdom suggests that lower interest rates should favor high-risk investments, the current economic environment, characterized by attractive returns on safe assets like RRPs, complicates this narrative. Investors and market watchers will likely keep a close eye on the upcoming Federal Reserve meeting to see how these dynamics play out further.
