Bitcoin and a range of altcoins saw a significant rally after Federal Reserve Chairman Jerome Powell hinted at a possible interest rate cut in September, sparking optimism across financial markets.
On August 24, Bitcoin surged to $64,000, while Ethereum rose to $2,765. This surge in cryptocurrencies boosted the total market capitalization by nearly 5%, pushing it above $2.26 trillion. The positive sentiment was also reflected in the stock market, with major indices like the Dow Jones, S&P 500, and Nasdaq 100 approaching record highs. However, questions linger about the durability of these gains.
Market Behavior: The “Buy the Rumor, Sell the News” Phenomenon
Investors had been anticipating a rate cut in September, especially after recent U.S. employment data fell short of expectations. For the past three weeks, the Fed Rate Monitor tool has shown an over 80% probability of a rate cut. Powell’s comments essentially confirmed these expectations, which may lead to profit-taking as the actual rate decision approaches.
This market behavior, commonly known as “buy the rumor, sell the news,” has been observed in both crypto and stock markets multiple times. For example, Bitcoin experienced a nearly 10% drop following its last halving event, and Ethereum faced double-digit declines after the SEC approved cryptocurrency ETFs. Historical trends also indicate that stocks often decline sharply when the Fed begins cutting rates, a pattern noted by conservative commentator Geiger Capital, who cited the rate cuts of 2001 and 2002 as examples.
Potential Upsides Despite Market Uncertainty
Despite the risks, there are reasons for optimism. Historically, stocks have performed well during periods of rate cuts, as seen in 2020 during the early days of the COVID-19 pandemic. Moreover, many U.S. companies are currently reporting strong earnings growth, which could provide additional support to the markets.
The Impact of Money Market Inflows
A significant factor to consider is the ongoing inflow of capital into low-risk money market funds, even as expectations for rate cuts rise. In the first half of August alone, these funds saw net inflows of over $90 billion, bringing their total assets to more than $6.2 trillion. This suggests that investors may continue to favor the safety of money market funds over riskier assets like cryptocurrencies and stocks, at least in the short term.
While the theory suggests that riskier assets like crypto and stocks will eventually benefit from a shift out of money markets, this transition could be gradual, particularly if interest rate cuts occur slowly over time.
Bitcoin’s Technical Outlook: Cautious Optimism
Bitcoin’s recent jump to $64,000 represents a recovery from its earlier dip to $49,000, but the price remains within a familiar range. Since March, Bitcoin has been forming a series of lower highs, with the first peak at $73,800, followed by $72,000 and $70,000. A decisive bullish breakout would require Bitcoin to surpass the initial high of $73,800. Until then, the risk of a return to a bearish trend remains.
On a more encouraging note, the sequence of lower highs and lower lows has created a falling broadening wedge pattern, a technical indicator often associated with a bullish reversal.
As markets continue to absorb Powell’s remarks and anticipate future rate cuts, the sustainability of the recent rally in Bitcoin and altcoins remains uncertain, with both opportunities and risks lying ahead.
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