Arthur Hayes Discusses the Impact of Fed Rate Cuts on Bitcoin

Arthur Hayes, the co-founder and former CEO of BitMEX, has shared insights on why the recent interest rate cuts by the U.S. Federal Reserve may not significantly benefit Bitcoin’s market price.

Rate Cuts and Bitcoin’s Performance

In a recent post, Hayes mentioned that even though Jerome Powell, the Federal Reserve chair, indicated potential rate cuts during the Jackson Hole speech on August 23, Bitcoin’s prices have been on a downward trend.

• After the speech, BTC briefly peaked at $64,000.
• The price subsequently dropped by 10%, reaching a low of $57,400 on September 2.
• At the time of writing, Bitcoin was trading at approximately $59,238.

Impact of Reverse Repos on Market Liquidity

Hayes highlighted the role of reverse repurchase agreements (repos), which involve the sale of securities with a future repurchase at a higher price. He noted that these agreements are currently yielding 5.3% interest.

This yield surpasses that of Treasury bills, which are yielding about 4.38%. As a result:

• Large money market funds are reallocating their funds from Treasury bills to reverse repos.
• This shift leads to a decrease in capital available for riskier assets like cryptocurrencies.

Further clarification from the X account ‘ELI5 of TLDR’ explained that the reverse repurchase program serves as a temporary “parking” space for funds held by major banks and money managers. Since it offers better returns than many safe investments, the capital tends to remain in these repos rather than circulating through the economy.

The Broader Implications of Rate Cuts

Since the Fed’s announcement regarding the potential rate cut in September, an additional $120 billion flowed into reverse repos, according to Hayes.

This trend contradicts the conventional belief that lower interest rates would benefit high-risk assets such as Bitcoin. Typically, low interest rates are perceived to promote borrowing and increase liquidity in markets, making riskier investments more attractive.

However, a stronger dollar, which often accompanies higher interest rates, could make Bitcoin less appealing by comparison.

Current Federal Reserve Outlook

The CME Fed Watch tool indicates a 69% probability of a 25 basis point cut and a 31% chance of a 50 basis point cut at the upcoming Fed meeting on September 18. A more substantial rate cut could suggest a more aggressive monetary policy, possibly spurring a stronger market reaction and boosting economic activity.