In recent months, I have written about the impact of money supply growth on Bitcoin and about the parallels between the 2020 interest rate cuts and the current one. In this post I would like to share my ideas on what will be important for Bitcoin over the next month. Please keep in mind that forecasting markets movements is highly speculative.
Asset reallocation
After the U.S. Federal Reserve began raising interest rates in March 2022, money market funds experienced massive inflows. By the end of Q2 2024, U.S. money market funds had reached an all-time high of $6.55 trillion. Money market funds are low-risk, short-term securities such as Treasury bills, certificates of deposit, and commercial paper, in which mainly banks, countries and companies invest. In recent years, however, retail investors have also been increasingly attracted to this high-yield instrument. The volume has increased by around 75% over the past two years. Given the ongoing Fed’s rate-cutting cycle, the yield on money market funds is expected to decline, potentially prompting investors to shift their portfolios toward riskier assets.
Extent of interest rate cuts and the impact on Bitcoin
This reallocation of capital will favour assets such as technology stocks and Bitcoin, meaning the upcoming interest rate cuts will continue to have a significant impact, as investors seeking riskier assets. The extent of outflows from money market funds remains to be seen and will depend on the pace of rate cuts. However, even slight reallocations will widen the supply and demand gap for Bitcoin.
The rate cuts also increase money supply growth, and both stocks and Bitcoin correlate with M2, as described in this blog post.
The extent of rate cuts at the next FOMC meeting on November 7 will depend on the economic data released in September and October. While the inflation rate will be an important indicator, data from the labor market will especially influence the Fed’s decision. Therefore, the data from September and October will influence the course of this Bitcoin cycle.
The expected interest rate cuts vary between financial institutions and analysts. The Bank of America projects are cuts of 75 basis points in the fourth quarter. In contrast, an analyst from J.P. Morgan, who had predicted the cut of 50 basis point, stated in a Bloomberg interview that he expected a further cut of 50 basis points in November. According to a Reuters poll of more than 100 economists, a cut of 50 basis points is the most likely outcome for the entire fourth quarter. The CME FedWatch tool might be the best indicator to look at, as interest rate traders correctly forecasted the 50-basis point cut for the September meeting. Although forecasts for the September meeting swung between a 25-basis point and a 50 basis point rate cut over the last month, the prediction of a 50 bps was accurate, with the forecast shifting to 50 basis points just a few days before the Fed’s decision.
According to interest rate traders, the probability of another 50 bps cut in November is now 50.8%. If futures traders’ predictions are roughly correct, this means that interest rates in December will most likely be between 400 and 425 basis points. All in all, a rate cut of 125 basis points.
In my blog post “Paralles to the 2020 interest rate cuts” I described how interest rate cuts affected technology stocks and Bitcoin in the past:
“After the COVID-19 pandemic emerged in early 2020, the Federal Reserve first responded with a rate cut of 50 basis points, bringing the target range to 1–1.25% on March 3, 2020. A second emergency rate cut took place on March 15, 2020, when the Fed further reduced the rate by 100 basis points, lowering it to a range of 0% to 0.25%. These rate cuts stabilized the stock markets, and from its March bottom, the Nasdaq 100 increased by more than 40%, regaining its all-time high by June 2020. The Bitcoin price followed the price gains of technology stocks and rose by 100%“
In the best-case scenario, economic growth will remain stable, the unemployment rate will not rise and the inflation rate will continue to fall, meaning that the probability of a recession in the USA will be close to zero. I think market participants may need to continue to build confidence that there will be no recession before new highs can be reached.
Mt.Gox
What could negatively impact the Bitcoin market in the coming months is that Mt. Gox reentering the spotlight. Approximately 45,000 bitcoins still need to be distributed to creditors. Although the exact distribution timeline is unclear and could extend into next year, this remains a risk to the market. However, it could have as little impact as the last distribution. Of the total 140,000 bitcoins, around 95,000 have already been returned to their owners. Contrary to many expectations, exchanges were not flooded with Bitcoin, and the distribution did not create an oversupply in the market.
More about Bitcoin in: “The fair value of Bitcoin is still zero?”
Update (November 20, 2024): The conflict of interest disclosure has been removed, as the author of this article no longer holds a financial interest in Bitcoin.
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