Should You Buy Bitcoin Before the Fed's September Rate Cut?

👇1-13) Last week, we predicted a rally in Bitcoin leading up to the U.S. inflation announcement, expecting inflation to decline. Our pre-CPI report, however, cautioned that any post-CPI spike in Bitcoin would be short-lived, and indeed, Bitcoin surged briefly before selling off. This occurred despite the probability of a September rate cut exceeding 90%.

👇2-13) To succeed in financial markets, you must bet against consensus and be right. Most traders anticipated lower inflation this time, leading to a fleeting post-CPI rally. Another crucial trading concept is recognizing when conditions shift from awful to less bad (1) or from less good to awful (2). Significant gains can be made in the former scenario, while substantial losses occur in the latter.

👇3-13) Currently, selling pressure from the German government is easing, and Bitcoin appears technically oversold. ETFs are buying the dip, and the Fed is expected to cut interest rates soon, providing the liquidity support many have anticipated.

Should you consider buying Bitcoin before the September rate cuts, assuming inflation will drop?

👇4-13) Lower interest rates generally stimulate the economy and provide liquidity to financial markets. As long as economic growth remains stable, rate cuts are positive. However, it's crucial to understand the reasons behind the Fed's rate cuts, as the outcome could align with either scenario (1) or scenario (2).

👇5-13) When the Fed raised rates to 1.50% in December 2017, Bitcoin entered a bear market until December 2018, when rates peaked at 2.50%. During the Fed's pause from rate hikes until July 2019, Bitcoin experienced explosive growth, returning +169%. This period exemplified scenario (1), where monetary policy went from awful (rate hikes) to less bad (pause).

👇6-13) Similarly, the Fed's anticipated rate hike cycle starting in December 2021 (it started in March 2022) saw Bitcoin fall into a bear market. The last rate hike was on July 26, 2023, with the Fed Funds rate reaching 5.50%. As it became clear the Fed was pausing, Bitcoin rallied significantly, returning +95%. Again, scenario (1) was at play.

👇7-13) Following a seven-month pause in 2019, the Fed cut interest rates, initiating a steep rate-cutting cycle. Initially, Bitcoin responded positively, rallying +19% within a week after the July 31, 2019, rate cut. However, two weeks later, Bitcoin was back to flat.

👇8-13) When the Fed cut rates again on September 19, 2019, market concerns about a deeper economic decline led to a 20% drop in Bitcoin within a week. Both cuts (the first in July and the second in September) were due to economic uncertainties, global conditions, low inflation, and a desire to sustain economic expansion. The July cut focused more on inflation (scenario 1), while the September cut highlighted growth risks (scenario 2).

👇9-13) If the Fed cuts rates solely due to inflation concerns in September 2024, it could be short-term bullish for Bitcoin (scenario 1). However, if growth concerns drive the cut, either in September or later, Bitcoin might face significant selling pressure (scenario 2). It’s crucial to understand the Fed's motivations. In either scenario, the rate cut did not trigger a substantial, lasting rally. It’s not the interest rate cut that matters necessarily for the bulls; it’s the ‘pause’, and the pause is soon behind us.

👇10-13) U.S. GDP has declined from +5% to just +1.4%, the ISM Manufacturing PMI has been in contraction since November 2022, and the unemployment rate is at its highest since December 2021, above the psychological 4.0% level. There is a risk that the Fed may cut rates because of weak growth, not just low inflation.

👇11-13) Weak growth and low inflation could cause a sharp Bitcoin decline, while a cut solely due to low inflation could be (temporary) bullish. This makes the September rate cut a binary event for Bitcoin traders who must understand the Fed's rationale.

👇12-13) September is still two months away, and various scenarios could unfold. Historically, August and September are seasonally bearish months for Bitcoin, and the lingering impact of Mt. Gox sell-offs remains significant. Additionally, Bitcoin miners are expected to continue liquidating inventory to fund their operations.

👇13-13) Bitcoin has surged close to $60,000, as we forecasted for this week. However, the market may be vulnerable to a pullback, potentially testing the $50,000 level within the next few weeks. Bitcoin is still in a downtrend. We remain cautious to bearish.