Bloodgood's Notes #141
Fed cuts rates by 50bps what does mean for Bitcoin and other risk on assets?
Fundamental Overview
In last week’s issue, I remarked how everything looked like the Fed was about to enter a nice, slow, orderly cutting cycle, as the market was pricing in a very high probability of a 25 bps cut. When the meeting finally happened, however, the Fed decided to cut by 50 bps, against most expectations. This might seem like it should be even better for the market—after all, we’re getting lower rates even quicker—but things aren’t that simple. Normally, the expected course in an economy that’s doing well would be to initiate a soft landing with a 25 bps cut, because cutting any faster would mean that the Fed is afraid of a recession, which isn’t a good sign; suffice it to say that the last two times the Fed started a cutting cycle with 50 bps were in 2001 and 2007.
Nevertheless, Powell kept on repeating the word “recalibrate,” trying to drive home the point that this is a 50 bps thoughtful adjustment and not a panic move. Judging by the market so far, it seems like the reactions are mixed, although fears of a recession are dampened quite a bit by very solid economic data.
Bitcoin
Bitcoin breaks above the infamous $60k level.
Bulls have managed to break above a key weekly level without dropping below the previous low at $49k. This could be a sign that the trend is shifting from bearish to bullish. Time will tell, but I’m now looking for a higher high, which would mean breaking above $65k. As discussed in the previous letter, the recent drop towards $50k wasn’t as significant as the one in early August, indicating that buyers were more aggressive. Whether that’s due to expectations of an interest rate cut or simply a perceived buying opportunity doesn’t matter—what matters are the levels and how we will trade them.
If a break above $65k happens, I expect more money to flow in, and $70k is possible within a couple of weeks. If $65k is rejected, we’ll likely test $60k again, and if that’s lost, months of pain could follow.
SPX, Gold, and DXY
While crypto is booming, stocks are fighting their own battle at the highs.
At the time of writing it has just break the ATH. I am expecting more buyers to follow here and push it higher into price exploration. If SPX is rejected at the ATH again, we could see a bigger drop back down to the breakout area at 5,261.
Gold continues its rally into all-time highs.
There’s no clear resistance level, so we’ll look at round numbers as psychological levels (such as $2,500, $3,000, etc.). In case of a reversal, $2,500 will be the first support to watch.
As risk-on assets grow, DXY drops and will likely continue to do so, given that it was rejected at the 101 level and more interest rate cuts will follow. As long as this continues, we can expect green markets.
Ethereum
Ethereum fails to keep up with Bitcoin’s strength once again.
While ETH seems weak at the moment, I’m confident that once Bitcoin makes its move, ETH will follow. ETH/BTC has dropped below 0.04 BTC, but keep in mind that the lowest point in 2020 was at 0.016 BTC. The primary target for ETH/USDT right now is the $2,600 resistance.
Concluding notes
Given that the markets look at least cautiously optimistic for risk-on assets, it won’t come as a surprise that Bitcoin ETFs are once again seeing decent inflows. Meanwhile, it’s still doom and gloom with Ethereum ETFs, but there are two reasons why it seems likely that this will change not too far down the line. First, Grayscale ETHE outflows are putting a lot of negative pressure on the flows, but this won’t go on forever. In percentage terms, outflows from ETHE look almost identical to those from GBTC, which is why it’s interesting to note that GBTC dumping stalled significantly about 80 days after the Bitcoin ETFs are launched, when just over half of total AUM had flowed out. If things continue to play out similarly with ETHE, then it has just over one month and roughly 15% of initial AUM to go before the outflows slow down considerably.
Second, there’s every reason to believe that the familiar dynamic between BTC and ETH will play out again, this time with TradFi investors. BTC will make its move first, leaving many funds sidelined and eager to make up for the fact that they hadn’t bought the BTC ETFs, as well as others that have managed to buy them, but that are no longer that confident in its outperformance after a parabolic rally. The only logical step for those investors will be to look a bit further out on the risk curve and buy Ethereum ETFs. In other words: we could have pretty much the same relationship we’ve seen in previous cycles, but this time playing out on Wall Street.