The Federal Reserve cut interest rates for the first time in almost a decade as it attempted to protect the thriving US economy from increasing global risks. The stock market, in an immediate response, closed lower on the day, with the Dow Jones Index, the S&P 500 Index, and Nasdaq Composite Index each returning intraday losses.
Faraway from the mainstream, bitcoin was also showing signs of growth ahead of the Fed chair Jerome Powell’s press conference yesterday. While it closed the day 5 percent higher, its gains are now getting negated, showing that the impacts of Fed rate cut are wearing off.
But, according to market analyst Alex Krüger, bitcoin is too young to be influenced by global-scale events such as a rate cut. The economist noted that the cryptocurrency saw a minor increase in its rate around 14:00 ET, the time of the Federal Reserve announcement. The US equity market started showing volatile behaviors around 14:37, during Powell’s conference. Bitcoin, on the other hand, remained calm.
“That’s how an uncorrelated asset for which monetary policy is a [very] minor driver trades,” said Krüger. “I’m surprised this is still the case, but it is. Theoretically, the more institutionalized class the asset class becomes, the more it will react to the Fed. Not there just yet.”
Indeed. Today's gain have nothing to do with the Fed. In fact, market thinks the Fed underdelivered today. Traditional assets crashed accordingly during the presser.
— Alex Krüger (@krugermacro) July 31, 2019
The So-Called Correlation
Bitcoin bulls believe that a negated interest rate is good for the cryptocurrency market. When the Federal Reserve makes lending cheaper, it automatically injects more US dollar liquidity in the market. As a result, borrowing goes up, and investors start allocating those acquired fiat units to other assets, including stocks, commodities, and whatnot.
There is a belief that many of those investors would allocate a certain percentage of their portfolio to bitcoin. Thomas Lee of Fundstrat told Fox Business the same: that the cryptocurrency is becoming a sort of haven for people looking to hedge risks outside the scope of macroeconomic events.
“Bitcoin’s becoming increasingly a macro-hedge for investors against things that could go wrong. Rate cuts are adding liquidity. Liquidity is pushing money into all these risk assets and also hedges, which is helping Bitcoin.”
The most significant catalyst that has backed bitcoin in the last fiscal quarter is US-China trade war. US-based Asset Management Firm Grayscale Investments published a report in June which mentioned that bitcoin outperformed traditional hedge assets as the two superpowers clashed over a yet-unsolved trade deal.
Bitcoin rose by 47 percent as US and China imposed billions of dollars worth of tariffs on each others’ goods, noted Grayscale, adding that the next best-performing asset was Japanese Yen, which surged by a dwarfed 2.1 percent.
Bitcoin Will React to Rate Cut
Bitcoin’s no-reaction to the Fed rate cut announcement does not reflect a non-correlation, believes Mati Greenspan. The senior market analyst at Tel Aviv-based eToro told BlockTV that bitcoin has a lagging effect – it takes time for the cryptocurrency to digest upon macroeconomic catalysts. He cited parallel market movements of Dow Jones and Bitcoin during the monetary easing cycle in the last decade. He also noted that both DJI and Bitcoin reacted to the prospects of a rate cut in a similar manner.
“Bitcoin has a lagging effect,” said Greenspan. “As central banks continue to talk about easing, we did see a rise in bitcoin […] I believe we’re gonna see a reaction from the cryptocurrency this evening when Fed decides they do want to cut interest rates.”
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