Bitcoin’s price experienced a sharp decline on Friday, falling briefly below $63,000, as recession fears spiked following unexpected US employment data. The US unemployment rate increased to 4.3% from 4.1% in July, causing risk assets to tumble. Bitcoin’s price dropped to $62,300 before rebounding to $63,000 amid turmoil in US equity markets.
The disappointing US jobs report revealed only 114,000 jobs were added in July, significantly below the projected 176,000. This, combined with the unexpected rise in unemployment, fueled concerns about a potential recession.
Economist Holger Zschaepitz highlighted the importance of the unemployment increase, noting that the Sahm Rule Recession indicator rose to 0.53 from 0.43, signaling a higher probability of an impending recession. As recession fears grew, US government bond yields fell sharply, and traders anticipated a more aggressive rate-cutting cycle from the Federal Reserve. Data from the CME’s Fed Watch Tool now suggests a greater than 70% likelihood of the Fed implementing a 50 basis point interest rate cut in September.
Why Aren’t Fed Rate Cut Bets Boosting Bitcoin?
The recent market activity raises the question of why increasing expectations for Fed rate cuts have not positively impacted Bitcoin’s price. Typically, such expectations are seen as a positive catalyst for Bitcoin. However, the current situation deviates from this norm due to the underlying reasons for potential Fed rate cuts.
Rate cuts intended to maintain a balanced economy without triggering a recession would likely benefit risk assets like Bitcoin. In contrast, if the Fed is forced into hasty rate cuts due to overly tight financial conditions and looming recession fears, the scenario is less favorable. This could potentially harm the economy and negatively impact Bitcoin, similar to the sharp interest rate hikes in 2022 following the economy’s overheating in 2021.
Bitcoin’s Future Outlook
Until recently, the prevailing market assumption was that the Fed would achieve a “soft landing,” controlling inflation without causing a recession. This assumption previously allowed rising expectations for Fed rate cuts to support risk assets, including Bitcoin. However, recent data challenging this narrative have made the outlook more complex, potentially increasing downside risks for Bitcoin’s price.
Bitcoin faces additional challenges, including the political landscape. US Vice President Kamala Harris’s increased chances of winning the November presidential election are perceived negatively by crypto markets due to former President Trump’s pro-crypto stance. Moreover, the looming supply overhang from the US government and Mt. Gox creditors adds further pressure.
If Bitcoin’s support at the 50 and 200-day moving averages ($63,100 and $61,300, respectively) fails, a decline below $60,000 is possible, potentially leading to a retest of recent lows around $53,000.
Potential for Bitcoin Price Rebound
While a US recession could initially pressure Bitcoin’s price, it would be premature to assume its demise. Historically, lower interest rates have eventually fueled significant recoveries. For instance, in 2020, global central banks slashed interest rates to zero to support economies hit by Covid-19 lockdowns, leading to a substantial Bitcoin price rebound in late 2020 and into 2021.
A sharp decrease in Fed interest rates could inject liquidity into the market, potentially driving a robust Bitcoin price recovery. Other factors, such as the upcoming US presidential election, could also impact the cryptocurrency market. While former President Trump is generally viewed as pro-crypto, many Democrats advocate for more crypto-friendly policies, suggesting a potential shift in the US political climate regarding cryptocurrency.
The Halving’s Significance
Additionally, Bitcoin’s recent halving event plays a crucial role. Historically, Bitcoin has shown a tendency for substantial rallies, often reaching new highs approximately six months after each halving event. The next six-month mark falls in October, which could further influence Bitcoin’s price trajectory.
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