Arthur Hayes Explains Why Fed Rate Cuts May Not Boost Bitcoin Prices
Arthur Hayes Warns Fed Rate Cuts Won’t Boost Bitcoin as Reverse Repos Drain Market Liquidity.
Key Takeaways:
- Arthur Hayes suggests Fed rate cuts may not boost Bitcoin due to reverse repos.
- Reverse repos are offering higher returns than Treasury bills, attracting more funds.
- The shift to RRPs limits market liquidity for riskier assets like Bitcoin.
Arthur Hayes, former CEO of BitMEX, has explained why the Federal Reserve's rate cuts may not be boosting Bitcoin prices as expected. Contrary to the assumption that lower interest rates would increase demand for riskier assets like Bitcoin, the actual outcome has been contrary to this expectation.
Arthur Hayes’ View on Fed Rate Cuts and Bitcoin Prices
Hayes pointed out a surprising contradiction on September 2 when he noted that Bitcoin prices have been declining since Federal Reserve Chair Jerome Powell hinted at a rate cut in his August 23 speech, contrary to expectations that the potential rate reduction would boost Bitcoin's value.
Bitcoin price rose to $64,000 after Powell's speech but plummeted by 10% to $57,400 on September 2. BTC is now trading at $59,238.
According to Hayes, a key factor contributing to this drop is the increased attractiveness of reverse repurchase agreements (RRPs).
RRPs offer higher yields than Treasury bills, prompting large money market funds to redirect their cash from Treasury bills to RRPs.
This shift has reduced liquidity in the market, making it challenging for riskier assets like Bitcoin to access capital, thereby impacting its price.
This is not the first time Hayes will comment on the Fed’s rate cut.
Last month, Arthur Hayes warned of short-lived gains in his article titled “Sugar High,” where he expressed skepticism about the sustainability of gains resulting from rate cuts.
Hayes argued that the Fed is seeking a temporary boost, likening it to a “sugar high,” and emphasized that the Fed should increase rates instead of cutting them, as the economy will eventually face the consequences of its actions.
Reverse Repos Impact on Bitcoin Liquidity
Hayes noted that reverse repos are paying around 5.3% interest, which is more attractive than the 4.38% offered by Treasury bills.
This has led to a large movement of capital into RRPs, with an additional $120 billion going into these agreements since the Fed hinted at a possible rate cut in September.
This movement of funds into RRPs has a direct impact on the liquidity available for assets like Bitcoin.
An X user, “ELI5 of TLDR”, explained that the RRP program can be likened to a parking lot where big banks and money managers can store their money overnight, earning interest without taking on risk.
Initially, many investors assumed that lower interest rates would lead to more borrowing and spending, thereby increasing market liquidity.
However, Hayes argues that as long as RRPs offer higher returns than Treasury bills, funds will continue to be parked in these safe investments, limiting money flow into riskier assets like Bitcoin.
The CME Fed Watch tool indicates a 69% chance of a 25 basis point cut at the Fed’s September meeting and a 31% chance of a 50 basis point cut. A larger rate cut could lead to a stronger market reaction.
Hayes suggests that the ongoing preference for RRPs over riskier investments may continue to dampen Bitcoin’s price gains, even in a lower interest rate environment.
Jimmy Aki
Drawing from his background in economics, Jimmy has monitored blockchain development for years, firmly believing in its power to democratise finance. Beyond offering commentary on the latest crypto developments, he also spends his time analysing open-source codes of promising projects on GitHub. Jimmy holds Bitcoin and Ethereum.
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