BitMEX co-founder Arthur Hayes says he may have identified a reason why Bitcoin (BTC) is not rallying despite a looming Fed rate cut.
Late last month, Fed Chair Jerome Powell hinted at upcoming rate cuts in a speech at the Jackson Hole economic symposium.
The speech ignited rallies in crypto and equities, sending Bitcoin to as high as $65,000 before losing momentum.
When the Fed slashes rates, yields on Treasuries decline which often triggers the movement of capital to risk assets such as stocks and crypto that could potentially offer greater returns.
But with Bitcoin currently trading below $60,000, Hayes says the capital rotation is not going as planned.
“Since Jay Powell announced the September rate cut at Jackson Hole, BTC is down 10%. Why? I thought rate cuts were good for risk assets.”
Hayes sheds light on why he thinks Bitcoin is correcting despite a potential Fed pivot. He says that while capital is leaving Treasuries, the funds are moving to the Fed’s reverse repo program (RRP), which is an obscure area of the financial system.
“RRP pays 5.3%. No T-bill under one year of maturity pays more. MMF (money market funds) will move money from T-bill -> RRP…
Since Jackson Hole [speech], RRP up $120 billion…”
The RRP is a financial facility that allows eligible parties to invest in assets sold by the Fed to be repurchased at specified later date in exchange for yields. Hayes says in a new essay that the facility currently offers the highest yield until September 18th when the Fed potentially cuts rates.
“As soon as the RRP started rising to the tune of ~$120 billion, Bitcoin swooned. A rising RRP sterilizes money as it sits inert on the Fed’s balance sheet, unable to be re-leveraged within the global financial system.”
The crypto veteran warns that Bitcoin could either chop or tumble until the Fed officially cuts rates.
“Assuming the Fed doesn’t cut rates before the September meeting, I expect T-bill yields to stay firmly below those of the RRP. As such, RRP balances should continue to rise, and Bitcoin, at best, will chop around these levels and, at worst, slowly leak lower towards $50,000.”
At time of writing, Bitcoin is trading for $56,703, down nearly 5% on the day.
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