Bitcoin’s price has remained stagnant despite the first rate cut by the US Federal Reserve since 2020, perplexing many investors and traders. Andrew Kang, CEO of Mechanism Capital, recently addressed the disproportionate emphasis placed on Federal Reserve rate cuts and economic stimulus in China by market participants.
Kang challenges the widespread belief that interest rate cuts by the Federal Reserve will significantly boost Bitcoin and crypto prices. He argues that “Fed rates are only one of the factors that impact global liquidity, and global liquidity itself is only one of the factors that influence crypto prices.” He finds it illogical to expect a strong inverse correlation between rates and Bitcoin, noting that Bitcoin had previously rallied by 4.5 times during a period when rates were at multi-decade highs, showing little correlation at the time.
While some argue that future rate changes are already priced into the market, Kang believes this logic should apply equally to rate hikes and cuts. He emphasizes that interest rates are overemphasized by most market participants. According to Kang, equities have a stronger tie to interest rates due to factors such as discount rates used in valuing cash flows and mature corporate debt markets used to finance growth.
Regarding China’s recent economic stimulus, Kang believes its impact on Bitcoin and crypto is even less significant than many assume. He comments that it is not surprising that those predicting extreme bullishness for crypto due to Chinese stimulus are primarily non-Chinese. Within China, there has been a noted shift from crypto investments to traditional stock market investments.
Kang supports his claim with data, pointing out that since the Chinese stimulus was announced, USDT has traded at a discount to CNY, currently at 3%. This suggests a decreased demand for the premier stablecoin Tether (USDT) in China, aligning with a move towards traditional equities.
Despite his critiques, Kang clarifies that he is not bearish on Bitcoin, but he believes some people have become overly optimistic. He anticipates Bitcoin trading within a range of $50,000 to $72,000 until a significant new catalyst emerges. He remains optimistic about market opportunities, stating that “the constant rotation of capital and new projects being developed means there will still be coins to buy to generate returns as a bull.” However, Kang warns of potential volatility due to leveraged positions, which are currently decently high.
Interacting with the community, user Jakubko suggested that Bitcoin’s 2023 price increase is more connected to the anticipation of an ETF launch than to interest rates. Kang agreed, noting that “interest rates are only a small piece of the puzzle.” Other factors, such as the ETF, were able to drive Bitcoin prices higher, and other factors could also drive it higher or lower.
Crypto analyst Astronomer also commented, noting that interest rates and yield inversion have a negligible impact on price, being more important for bond market players than for stocks or crypto. Another analyst, Res, highlighted the correlation between Bitcoin and monetary supply, stating that Bitcoin is more correlated to the quantity of money than interest rates, which were close to their peak when Bitcoin started to rise.
At press time, Bitcoin traded at $60,903.