Legendary trader and BitMEX founder Arthur Hayes said that Federal Reserve Chairman Powell made it clear at the Jackson Hole annual meeting on August 23 that he would start an interest rate cut cycle in September, but Bitcoin has been struggling. He explained that the Federal Reserve's interest rate cuts have not helped Bitcoin's surge, and capital flows have shifted from Treasury bills to reverse repurchases with higher returns.
When explaining the reason why "Bitcoin has been unable to rise", Hayes mentioned the reverse repurchase agreement in the U.S. market, which is selling securities and agreeing to buy them back at a higher price at a specific date in the future, and pointed out that reverse repurchase agreements The interest rate is 5.3%.
This yield is higher than Treasury bills (short-term government debt), which have a lower yield of 4.38%.
“As a result, large money market funds took cash out of Treasury bills and put it into reverse repos, resulting in less money circulating in the market for risky assets such as cryptocurrencies,” Hayes explained.
Twitter account ELI5 of TLDR pointed out that reverse repo programs can serve as overnight parking lots for big banks and money managers to store cash. They mention that it also has higher returns than other safe investments, so capital stays in the "parking lot" rather than moving through the economy.
Hayes said an additional $120 billion has entered the reverse repo market since the Fed announced it might cut interest rates in September.
source: FRED
He continued that this development goes against the common assumption that low interest rates are beneficial to risky assets such as Bitcoin.
Most believe that low interest rates encourage borrowing and spending, which means more liquidity in the market as safer, interest-bearing accounts become less attractive, while a weaker dollar could make Bitcoin appear stronger.
According to CME's Fed Watch tool, the probability of a 25 basis point rate cut by the Fed at its September 18 meeting is now 69%, and the probability of a 50 basis point rate cut is 31%.
A larger interest rate cut would signal a more proactive stance by the Federal Reserve and could trigger a stronger market reaction, thereby boosting economic activity to a greater extent.
It is worth noting that Arthur wrote earlier in August that central banks around the world, now led by the Federal Reserve, are reducing the cost of funds. The Federal Reserve cuts interest rates amid above-target inflation, while the U.S. economy continues to grow. The Bank of England and the European Central Bank are likely to continue cutting interest rates at their upcoming meetings.
He further mentioned in the article that U.S. Treasury Secretary Yellen promised to issue $271 billion in treasury bills and conduct $30 billion in repurchases by the end of the year. This will add $301 billion in U.S. dollar liquidity to financial markets. The U.S. Treasury Department has about $740 billion left in the Treasury Account (TGA), funds that can and will be used to stimulate markets and help Harris win.
He said that entering the final stage of the third quarter of 2024, fiat liquidity conditions are very favorable for cryptocurrency holders. He predicted that if there is an economic recession in the United States, the Federal Reserve will increase its money printing efforts, thus driving Bitcoin to skyrocket.
But from the current perspective, there appears to be a subtle shift in his outlook.