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A couple days after Fed Chair Jerome Powell’s widely watched Jackson Hole speech feels like a great time for a high-level update — particularly as macro’s effect on crypto markets has increased over time.
We still don’t know what the Fed will do at its Sept. 17 meeting. But to many, Powell’s comments had a dovish tilt, leaving the door open for an interest rate cut next month.
If we look at CME Group’s FedWatch tool — based on 30-Day fed funds futures prices, as of midday Monday — many think a 25-basis point cut is in the cards. The bottom section shows that expectation much higher than a month ago:
While an interest rate cut is generally good for risk assets like bitcoin, it’s a bit more nuanced than that. BTC surged above $117,000 on Friday before reversing course to below $111,000. The asset was trading for around $112,600 at 1:30 pm ET.
The broader trajectory of where crypto markets are headed will still depend on the macro backdrop, argued YouHodler markets chief Ruslan Lienkha.
“If inflationary pressures persist, the Fed may be forced into another prolonged pause, limiting the sustained impact of a single cut,” he told me. “Moreover, if a rate reduction is perceived as an emergency response to a recession, it could weigh on crypto alongside other risk assets.”
The best scenario? A cut that is part of a successful Fed effort to engineer a soft landing.
“In that environment, bitcoin is likely to capture the bulk of institutional inflows, given its position as the most established digital asset,” Lienkha said. “Select altcoins could outperform in percentage terms due to their higher volatility and lower liquidity, amplifying upside moves when capital flows broaden beyond bitcoin.”
Speaking of institutional flows, crypto investment products saw more than $1.4 billion leave their coffers last week, according to CoinShares — the highest weekly outflow total since March. Within that data, we saw early-week pessimism around the Fed’s stance appearing to drive the outflows, before a recovery later on (mostly with ether products) around Powell’s remarks.
While $625 million flowed into US ETH ETFs on Thursday and Friday combined, $217 million exited BTC funds on those two days. Month-to-date net inflows for ETH and BTC ETFs are at +$2.5 billion and -$1 billion, respectively, “marking a notable change in investor sentiment toward the two assets,” noted CoinShares’ James Butterfill.
What did asset allocators take away from Friday?
CK Zheng, co-founder of crypto hedge fund ZX Squared Capital, called Powell’s pivot to possibly start cutting rates “significant” for risky asset classes.
His year-end target for bitcoin is between $125,000 and $150,000. He expects ETH to finish the year between $6,000 and $7,000. (It hovered around $4,600 Monday afternoon).
Globe 3 Capital CIO Matt Lason said that any rate cut signal confirms the hedge fund’s bullish positioning given how important more liquidity is in crypto. He expects the intensity of the ongoing crypto bull market to be strongest in Q4.
The expected rate cuts spurred Globe 3 Capital to rotate more of its holdings into smaller cap tokens “as we are seeing early signs of the long-awaited alt coin season,” Lason added.