Bitcoin and altcoins saw a significant rebound after Jerome Powell, the Federal Reserve chairman, hinted that interest rates might start falling in September.

Bitcoin and Ethereum Surge

On August 24, Bitcoin surged to $64,000 while Ethereum climbed to $2,765. The total market cap of all cryptocurrencies increased by nearly 5% to over $2.26 trillion. This bullish trend was mirrored in the stock market, with key indices like the Dow Jones, S&P 500, and Nasdaq 100 approaching their all-time highs. However, there is a risk that these gains might be short-lived.

Market Sentiment: Buy the Rumor, Sell the News

Investors were already anticipating rate cuts for September due to recent weaker-than-expected U.S. jobs numbers. The probability of a rate cut, as monitored by the Fed Rate Monitor tool, has been above 80% for the past three weeks. Powell’s statement served as a hint for the upcoming meeting scheduled for September 18. With a rate cut already priced in, there is a risk that stocks and cryptocurrencies might retreat as investors sell the news.

Bitcoin dropped by almost 10% after its halving event, and Ether has seen double-digit declines since the SEC approved ETFs.

Historical Context and Current Trends

Historically, stocks often drop sharply after the Fed starts cutting rates. For instance:

  • First Rate Cut – Jan 3, 2001: S&P 500 fell ~39% over the next 448 days, unemployment rose by 2.1%
  • First Rate Cut – Sep 18, 2007: S&P 500 fell ~54% over the next 372 days, unemployment rose by 5.3%

However, there are positive aspects as well. Stocks performed well when the Fed started cuts during the early stages of the Covid-19 pandemic in 2020. Additionally, American companies are currently reporting strong earnings growth, which could support the market.

Money Markets and Cryptocurrency Trends

Cryptocurrencies might face a retreat after the Fed begins cutting rates due to the inflow into low-risk money market funds. Data shows these funds had over $90 billion in net inflows in the first half of August, even as expectations for rate cuts rose. These funds now hold over $6.2 trillion in assets. While risky assets like crypto and stocks are expected to see more inflows as money market investors shift, this rotation will likely take time due to the gradual nature of interest rate cuts.

Bitcoin’s Price Action

Bitcoin rebounded to $64,000 after falling to $49,000 earlier this month. However, this price action does not yet confirm a complete breakout, as Bitcoin has remained within this range over 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. A complete bullish breakout will be confirmed if Bitcoin clears the first high at $73,800. Until that happens, there is a risk of Bitcoin resuming its bearish trend.

On a positive note, the series of lower highs and lower lows have resulted in a falling broadening wedge pattern, a popular bullish indicator.

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