- Bitcoin dropped 10% to $57,400 after Fed rate cut hints, despite expectations of a price boost.
- Reverse repurchase agreements yield 5.3%, leading to capital shifts from Treasury bills.
- $120 billion flowed into reverse repos after the Fed's September rate cut hint.
Bitcoin prices have been under downward pressure even as The U.S. Federal Reserve makes vague references to a possible interest rate cut. After briefly hitting $64,000 on September 2, Bitcoin fell 10% to a low of $57,400. The cryptocurrency has made a slight comeback as of September 3, trading at $58, 923 as of the time of writing this article.
However, the market is still quiet despite hopes that lower interest rates would spur the price of Bitcoin. According to former BitMEX CEO Arthur Hayes, this trend is the result of capital moving from Treasury bills to reverse repurchase agreements (RRPs), which have higher yields.
Capital Shift to Reverse Repos
Notably, due to their appealing yields, reverse repurchase agreements, or RRPs, have been drawing a lot of capital. Currently, the interest rate on RRPs is 5.3%, higher than the yield on Treasury bills (4.38%). Due to this, significant money market funds have started to shift their holdings from Treasury bills to RRPs.
Consequently, this change has reduced the amount of liquidity available for riskier assets like Bitcoin. According to Hayes, the RRP program serves as a short-term "parking lot" where large banks and money managers can leave their cash while still making a higher return than they would from other secure investments.
Impact of Anticipated Rate Cuts on Bitcoin
Notably, when the Federal Reserve first announced its anticipated rate reduction on September 18, it was thought to be a sign of hope for the cryptocurrency. In general, lower interest rates promote borrowing and spending, which boosts market liquidity.
Furthermore, a decline in rates may devalue the US dollar and increase the allure of Bitcoin to investors. But Hayes contends that the money moving into RRPs rather than riskier investments like Bitcoin is impeding the future rise of cryptocurrencies.
Reverse Repo Program Gains Traction
Moreover, reverse repurchase agreements have seen an additional $120 billion in funding since the Federal Reserve hinted at a potential rate cut in September. This pattern shows how the dynamics of the market have changed, and lower interest rates do not always equate to a bullish outlook for riskier assets like Bitcoin.
Due to the higher yields offered by the reverse repo program, a substantial amount of capital that would otherwise support asset classes like cryptocurrencies is not in circulation.
Therefore, the intricate connection between interest rates and market liquidity is demonstrated by the recent fluctuations in the price of bitcoin. Although a rate reduction might typically be viewed as advantageous for Bitcoin, the current capital shift toward reverse repos implies a different result.
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