BitMEX co-founder Arthur Hayes says he may have identified a reason why Bitcoin (BTC) isn’t recovering despite a looming Fed rate cut.
Late last month, Fed Chairman Jerome Powell hinted at coming rate cuts in a speech at the economic symposium in Jackson Hole.
The speech sparked rallies in crypto and stocks, sending Bitcoin soaring to $65,000 before losing momentum.
When the Fed cuts rates, Treasury yields fall, often leading to capital movements into risky assets like stocks and crypto that can potentially deliver higher returns.
But with Bitcoin currently trading below $60,000, Hayes says say the capital rotation does not go as planned.
“Since Jay Powell announced the Jackson Hole rate cut in September, BTC has fallen 10%. Why? I thought interest rate cuts were good for risky investments.”
Hayes sheds light on why he thinks Bitcoin is correcting despite a possible Fed reversal. He says that as capital leaves government bonds, the funds go into the Fed’s reverse repo program (RRP), an obscure part of the financial system.
“RRP pays 5.3%. No T-bill with a term of less than one year pays more. MMF (money market funds) will move money from T-bill -> RRP…
Since Jackson Hole [speech]RRP up by $120 billion…”
The RRP is a financial facility that allows eligible parties to invest in assets sold by the Fed to be repurchased at a specified later date in exchange for returns. Hayes say in a new essay that the facility currently offers the highest yield until September 18, when the Fed may cut rates.
“As soon as the list price started to rise to ~$120 billion, Bitcoin swooned. A rising RRP sterilizes the money because it sits inert on the Fed’s balance sheet and cannot be redeployed within the global financial system.”
The crypto veteran warns that Bitcoin could fall or tumble until the Fed officially cuts rates.
“Assuming the Fed does not cut rates before the September meeting, I expect Treasury yields to remain firmly below the RRP. As such, RRP balances should continue to rise, and Bitcoin will at best chop around these levels and at worst slowly drop to $50,000.”
At the time of writing, Bitcoin is trading at $56,703, down almost 5% on the day.
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