Arthur Hayes Explains Why Fed Rate Cuts May Not Boost Bitcoin

Bitcoin's Decline Despite Rate Cut Announcement

Since Powell's announcement, Bitcoin's price experienced a brief spike to $64,000, only to drop by 10% to a low of $57,400 on September 2. Although Bitcoin has slightly recovered, trading at $59,238, the expected rally following a rate cut has yet to materialize.

Reverse Repurchase Agreements and Market Liquidity

Hayes attributes this lackluster performance to the dynamics of reverse repurchase agreements (reverse repos). These financial transactions, where securities are sold with an agreement to repurchase them at a higher price in the future, are currently offering an attractive 5.3% interest rate. This rate surpasses the yields of Treasury bills, which are currently at 4.38%.

As a result, large money market funds are shifting their capital from Treasury bills to reverse repos, reducing the amount of liquidity available for risk-on assets like Bitcoin. Hayes explains that this shift in capital allocation is contributing to Bitcoin's decline, despite the expectation that lower interest rates would boost high-risk assets.

Implications of Continued Reverse Repo Activity

Since the Fed's rate cut announcement, an additional $120 billion has flowed into reverse repos. Hayes notes that this trend contradicts the common belief that lower interest rates naturally benefit assets like Bitcoin. Typically, lower rates encourage borrowing and spending, increasing liquidity in markets and making riskier investments more attractive. However, the current reverse repo activity suggests that liquidity may remain constrained.

As the Federal Reserve's September 18 meeting approaches, the market is watching closely, with a 69% chance of a 25 basis point cut and a 31% chance of a 50 basis point cut. The outcome could have significant implications for market liquidity and Bitcoin's price movement.