Bitcoin and altcoins staged a strong comeback after Jerome Powell, the Federal Reserve chairman, hinted that interest rates would start falling in September.
Bitcoin (BTC) jumped to $64,000 on Aug. 24 while Ethereum (ETH) pushed to $2,765. The total market cap of all coins rose by almost 5% to over $2.26.
The same trend happened in the stock market, where key indices like the Dow Jones, S&P 500, and the Nasdaq 100 approached their all-time highs. Still, there is a risk that gains in the stock and crypto market will be short-lived.
Buy the rumor, sell the news
The market was already factoring in rate cuts for September after the recent weaker-than-expected U.S. jobs numbers. The probability in the Fed Rate Monitor tool has been above 80% in the past three weeks.
Therefore, Powell’s statement was just a clue as to what to expect at the next meeting, scheduled for Sept. 18. As such, with a rate cut fully priced in, there is a risk that stocks and crypto will retreat as investors sell the news.
This trend has happened several times. For example, Bitcoin dropped by almost 10% after halving, while Ether has fallen by double digits since the Securities and Exchange Commission approved ETFs.
Stocks typically drop sharply after the Fed starts cutting rates. Geiger Capital, a conservative-leaning commentator on X.com, recalled 2001 and 2002 as examples.
On the positive side, stocks have done well when the Fed starts cuts, as we saw in 2020 during the early stages of the Covid-19 pandemic.
Another positive is that these cuts are coming at a time when American companies are reporting strong earnings growth.
Money markets are seeing inflows
Another reason why cryptocurrencies may retreat after the Fed starts cutting is that low-risk money market funds are still seeing inflows.
Data shows that these funds had over $90 billion in net inflows in the first half of August even as expectations of rate cuts rose. These funds now hold over $6.2 trillion in assets.
The theory has been that risky assets like crypto and stocks will see more inflows as money market investors capitulate.
This rotation will likely happen, but it will take time since interest rate cuts will likely be gradual.
Bitcoin is still forming lower highs
Bitcoin rebounded to $64,000 after falling to $49,000 earlier this month. However, this price action is still not yet a complete breakout because it has remained in this range in the past few months.
Notably, Bitcoin has been forming a series of lower highs since March. The first high was at $73,800 followed by $72,000 and $70,000. As such, a complete bullish breakout will be confirmed if the coin clears the first high at $73,800. Before that happens, there is a risk that Bitcoin will resume the bearish trend.
On the positive side, the series of lower highs and lower lows has resulted in a falling broadening wedge pattern, a popular bullish sign.