Arthur Hayes examines the impact of Fed rate cuts on bitcoin prices

Arthur Hayes, co-founder and former CEO of BitMEX and currently Chief Investment Officer at Maelstrom, recently shared his insights on why the expected interest rate cuts by the US Federal Reserve may not boost bitcoin prices as expected.

During his speech in Jackson Hole on August 23, Federal Reserve Chairman Jerome Powell all but confirmed a September interest rate cut. However, despite this, bitcoin prices did not show the positive reaction that many expected. Following the announcement, bitcoin initially rose to $64,000, but then fell 10% to $57,400 by September 2. As of September 3, the price has recovered slightly to $59,238.

The Role of Reverse Repurchase Agreements (RRP)

Hayes pointed to the role of reverse repurchase agreements (RRPs) in this dynamic. RRPs, which involve selling securities with an agreement to repurchase them at a higher price in the future, are currently offering an interest rate of 5.3%. That rate is significantly higher than the Treasury yield of 4.38%.

This imbalance has led to a shift in large money market funds’ capital from T-bills to RRPs, which has reduced the amount of money available for riskier investments like cryptocurrencies. The “ELI5 of TLDR” account on X further explained that RRPs serve as a sort of overnight parking lot for large banks and fund managers, where they can earn higher returns compared to other safe investments, thereby keeping their capital out of the broader economy.

Impact of Fed’s Likely Interest Rate Cut

Since the Fed hinted at a likely rate cut in September, an additional $120 billion has flowed into the RRP. The move contradicts the general assumption that lower interest rates are good for high-risk assets like Bitcoin. The conventional wisdom is that lower interest rates encourage borrowing and spending, which increases liquidity in the market and reduces the appeal of safer interest-bearing accounts, potentially strengthening Bitcoin against a weaker dollar.

According to the CME Fed Watch tool, the probability of a 25 basis point rate cut is 69%, and the probability of a 50 basis point cut at the Fed’s September 18 meeting is 31%. A larger rate cut could indicate a more aggressive approach by the Fed, potentially leading to a stronger market reaction and a significant boost to economic activity.

Date	Event	Bitcoin price reaction
August 23	Powell’s Speech at Jackson Hole	Increase to $64,000
September 2nd	Market Adjustment After Speech	Down to $57,400
September 3	A slight revival	It increases to $59,238
September 18	Upcoming Fed Meeting	Expected volatility

Arthur Hayes’ analysis provides nuance on the interplay between Federal Reserve policy, market instruments like RRPs, and the cryptocurrency market. While conventional wisdom suggests that lower interest rates should encourage high-risk investments, the current economic environment, characterized by attractive yields on safe-haven assets like RRPs, complicates this narrative. Investors and market observers will likely be closely watching the upcoming Federal Reserve meeting to see how this dynamic plays out.

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