10x Research looks into triple threats facing the market: the Fed decision, inflation data and the elecation debate.

Author: Markus Thielen, Founder and CEO of 10xResearch

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Bitcoin Faces Triple Threat: Fed Decision, Inflation Data and Presidential Election Debate

Financial markets are facing three key uncertainties: the Federal Reserve's next decision in September, upcoming U.S. inflation data and the outcome of the U.S. Presidential election. With the Fed entering a two-week blackout period, markets will likely remain on edge. We anticipate a 50 basis point rate cut to keep the Fed ahead of economic risks, as a smaller 25 basis point reduction might be insufficient to prevent further damage, given the delayed effects of monetary policy over several quarters.

Exhibit 1: Bitcoin — Trading Within a Narrowing Range

While a 50 basis point cut could unsettle investors, the Fed aims to mitigate economic risks, rather than manage market reactions. Despite the probability of a 50 basis point cut being just 29% — which contrasts with our view and broader market consensus — there’s a growing belief that the Fed has fallen behind, especially after overlooking early signs of labor market weakness this summer.

Market Still Believes A Trump Victory Is More Crypto-Friendly

On the political side, betting odds from Polymarket show that Trump has a 51% chance of winning the election, while Kamala Harris is at 46%. Nate Silver's forecast similarly gives Trump a 63.8% probability of victory, compared to 36% for Harris — his highest prediction for Trump. These figures shifted following the Democratic National Convention, when Harris reiterated her commitment to a high-tax policy. However, Allan Lichtman, known for his "13 Keys" model that has accurately predicted 9 of the last ten presidential elections, currently projects a Harris victory, as she holds 8 of the 13 keys.

The upcoming Harris-Trump debate on Tuesday, September 10, is expected to provide more insight into the race. To date, Harris has limited her direct media exposure, instead relying on favorable coverage — an approach that some interpret as an indication that her campaign is tightly managed by party leaders, rather than driven by her strategy. Despite this, we continue to lean toward a Trump victory, as in 2016, even amid efforts by certain establishment groups working behind the scenes.

Market Closely Watches Out For Inflation Data and September 2024 FOMC Meeting

The U.S. CPI report, due the day after the debate, will carry added significance. Expectations suggest a decline from 2.9% to 2.6%, which could support the Fed's 50 basis point rate cut. With the current Fed interest rate between 5.25% and 5.50%, and monetary policy deemed restrictive above 3.0%, rates may be around 200 basis points too high. This is practically confirmed by the 2-year Treasury yield, which indicates a 160 basis point rate reduction. If the CPI stays at 2.9% or higher, we still anticipate a 50 basis point cut.

Initial market expectations were for six rate cuts in 2024. However, at the March 2024 Federal Open Market Committee (FOMC) meeting, Fed Chair Powell highlighted the need for flexibility, due to ongoing economic uncertainties, especially given mixed inflation data and signs of slowing growth. He also acknowledged the challenge of achieving the Fed's 2% inflation target. Bitcoin's price surge before the release of the higher-than-expected March CPI figure, followed by a sharp drop after the FOMC meeting, underscores the critical importance of the next few days.

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Bybit x 10x Research: Bitcoin Braces for Impact: Fed Decision, Inflation Data and Election Debate

10X dives into how weakening fundamentals might rattle the market in the short term.

While we remain optimistic about digital assets' mid- to long-term prospects, the current evidence warrants caution. Despite near–V-shaped rebounds following dips in early May, July and August, the market structure and fundamentals have weakened, with each dip deeper and each recovery more muted. Recent data suggests we’re approaching a critical tipping point in September, marked by declining demand.

Contrary to the common belief that Bitcoin's price is primarily driven by supply changes, such as halving events, our research shows that demand fluctuations have been the key drivers of each bull market. Bitcoin's price declines when demand weakens, reflecting its nature as a highly cyclical asset. While cycle lows often align with mid-halving points, price peaks are driven by surges in demand, as seen in the 2011, 2013, 2017 and 2021 bull markets.

One early indicator that the latest bull market has been maturing is the peak in new Bitcoin address growth at 720,000 between September and November 2023, which has since declined to 240,000. The market value to realized value (MVRV) ratio shows diminishing returns for each bull market, with the most recent peak in March 2024. Additionally, the supply held by short-term holders reached its highest level in April 2024, signaling declining interest from short-term traders. On-chain momentum has steadily decreased since June, reaching levels typically associated with a bear market.

We have long maintained that the stock-to-flow model will ultimately fail, as outlined in our May 10 report. This supply-based model, which assumes Bitcoin can continue to increase tenfold every four years, is unrealistic. Our analysis shows that this model began to break down during the most recent cycle, when Bitcoin failed to reach the $100,000 target. Instead, we use a diminishing returns model focused on demand to better gauge the length and dynamics of Bitcoin cycles.

This cycle has been driven by two major demand factors, both of which are slowing down. Our negative outlook on Ethereum has been clear for months, as declining revenues indicate a broader market shift in demand. This explains Bitcoin's struggle to reach new highs while the broader ex-BTC crypto market remains under pressure.

Exhibit 1: SOL-USDT (LHS) vs. Solana Monthly Fees (RHS, $ million)

One of the biggest surprises this cycle has been Solana, which rolled out significant upgrades in October 2023 to address its past network congestion and outage issues. At the Breakpoint 2023 event, Solana unveiled the Firedancer upgrade, successfully launched on the testnet that same month. Despite Solana’s impressive rally to $200, it still fell short of its 2021 high of $250, forming a lower high.

The launch of several new meme coins on Solana drove protocol revenues from $7 million to $35 million, with the SOL-USDT pair doubling in value between February and March 2024 as retail investors poured into meme coins and Crypto Twitter buzzed about tokens like Dogwifhat, Pepe and Floki. However, this surge in revenue, while notable, remains modest for a protocol with an $80 billion market cap, especially given expenses and token incentives of $415 million. As revenues dropped to $16 million by August, a clear downward trend emerged, reflecting waning demand for meme coins and reduced trading activity.

Ethereum also appears overvalued amid falling revenues, a trend that has been evident since April (as highlighted in our June report). With ETH-USDT down 35%, the ongoing correction is likely to continue, which could dampen any potential Bitcoin rally. Similarly, Solana's steep 44% month-over-month fee decline reflects the fading meme coin hype, with prices also trending downward. This decrease in market activity could prompt further profit-taking and stop-loss selling, potentially driving prices lower as we approach September, historically Bitcoin's weakest month.

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Weakening Market Fundamentals and Declining Demand Signal a Potential Downturn for Bitcoin and Digital Assets in Sep 2024

Check out the latest opinion piece from 10x Research!

In today's volatile market, swift and strategic trades are essential. It’s crucial to anticipate macroeconomic shifts, especially as Bitcoin continues to trade within a broad range. That’s why, in last week’s report, we analyzed Bitcoin’s evolution as the Fed cut interest rates, and wrote about the U.S. inflation index.

We expected the FOMC minutes to lean dovish, with Fed Chair Powell emphasizing labor market weaknesses. This dovish softer stance fueled Bitcoin's surge, which resulted in solid returns. Liquidity inflows have reached a new high for the year at $61.9 billion, driven by increased 

 minting and rising leverage through Bitcoin perpetual futures, further fueling positive price momentum.

As critical macroeconomic data looms, Bitcoin's upward trend may persist, bolstered by consistent, modest inflows into Bitcoin Spot ETFs. The macro environment has seen notable shifts since early July, with the U.S. dollar peaking, Treasury yields declining and oil prices falling. This has coincided with a three-month decline in the ISM

 manufacturing index, indicating potential economic weakness.

Consequently, risk assets have faced sharp sell-offs, exacerbated by rising unemployment. Since Bitcoin is correlated with risk assets such as stocks, the correlation that a stronger ISM manufacturing index could be bullish for stocks should also be valid for Bitcoin (and vice versa). With weak economic indicators and a declining dollar, Powell's recent speech has set expectations for increased market liquidity, potentially benefiting risk assets like Bitcoin.

Exhibit 1: SP500 (LHS, YoY %) vs. ISM Manufacturing Index (RHS)

However, this positive outlook hinges on the broader economy’s stability. Next week's key data points (ISM manufacturing index, U.S. unemployment rate and nonfarm payrolls) will be critical in shaping the market's direction for the remainder of 2024. Optimistic results could stabilize the economy and support rate cuts, without stoking fears of economic weakness.

Expectations of a soft landing could support risk assets

Most economists expect a soft landing for the economy, and any weakness in those indicators would likely result in higher odds of a U.S. recession. However, judging by the stock market performance when a weaker Purchasing Managers’ Index (US PMI) was released, and tech stocks fell 1.5%, there’s a bit of worry brewing under the surface due to the non-zero probability that the U.S. economy is indeed weaker than expected.

Most experienced crypto traders know that a recession would result in the Federal Reserve injecting stimulus into the financial markets and economy, which has benefited Bitcoin. But how fast would the Fed react to support the economy? In any such scenario, Bitcoin would price lower, in conjunction with other risk assets.

However, this is not our base case. Expectations are that macroeconomic data could reverse some of the weakness of the past three months. This would leave risk assets to benefit from lower interest rates, which appears to be assured with Fed Chair Powell’s confirmation last week. As a critical beneficiary of lower interest rates, Bitcoin should benefit if economic growth remains solid.

Intermediate

Bybit x 10x Research — Bitcoin Poised for Rally if U.S. Employment and Economic Growth Meet Expectations

Bybit x 10x Research presents you our view on the impact from upcoming Fed rate cuts.

Markus Thielen, Founder and CEO of 10xResearch

Bitcoin's Lessons From the Fed's 2019 Rate Cuts

Markets are eagerly anticipating Fed Chair Powell’s speech on Friday, August 23, at Jackson Hole. He’s expected to signal that the Federal Reserve is prepared to cut interest rates at its upcoming September 18, 2024 meeting. This decision would follow one of the longest periods in recent history during which the Fed raised rates, paused for an extended duration and shifted to a more accommodative monetary policy.

Given Bitcoin's relatively short 15-year history, there are few historical parallels to draw from when comparing its performance during near-zero interest rates, such as those seen after the Global Financial Crisis of 2007-2008. However, the last time monetary policy followed a similar path with the Fed adopting a wait-and-see approach, Bitcoin experienced significant gains. This suggests that Bitcoin performs strongly when the Fed pauses its tightening cycle.

After consistently raising rates throughout 2018, the Fed’s decision to hold the federal funds rate steady at its Jan 30, 2019 meeting marked a pivotal shift in monetary policy. This pause reflected the Fed’s more cautious response to growing economic uncertainties and concerns over slowing global growth, signaling a move from aggressive tightening toward a more measured approach.

On Jul 31, 2019, the Fed lowered the federal funds rate, which fueled a 169% surge in Bitcoin prices from the Fed's pause in January 2019 to this first rate cut in July. Fed Chair Jerome Powell attributed the rate reduction to global economic uncertainties, muted inflation, a mid-cycle adjustment and the desire to support ongoing economic expansion.

Exhibit 1: Bitcoin in 2018–2020 (LHS) vs. U.S. Interest Rates (RHS)

Although Bitcoin initially jumped 20% following the Federal Reserve's rate cut, this rally was short-lived, as prices declined. Despite the Fed implementing two additional rate cuts later in the year, Bitcoin ended 2019 down 35% from its peak following the first rate cut.

What This Could Mean for Bitcoin in 2023–2024

Similarly, after the Fed's final rate hike in July 2023, Bitcoin was trading at around $29,300, and has since more than doubled in value. However, it's important to consider the less optimistic scenario when the Federal Reserve begins cutting interest rates. Traders need to understand the underlying reasons behind the rate cuts, as the context for such decisions can significantly influence market reactions.

This experience underscores the Fed's decision to cut interest rates in 2019, driven by low inflation, broader economic uncertainties and the need to support ongoing economic growth. 

Unlike in 2019, Powell may now stress that, while inflation remains above the Fed's 2% target and monetary policy remains restrictive, a modest 25 basis point (bps) interest rate cut could still be considered. This stance, shy of a 50 bps cut, could raise concerns and send a negative signal to markets. Just as in 2019, Bitcoin could initially surge following a rate cut announcement, only to quickly lose those gains as economic uncertainties mount.

Investors should pay close attention to Powell's statements, and track economic data carefully. A data-dependent Fed will likely wait to see how incoming information influences interest rate decisions at upcoming meetings. Savvy investors can position themselves strategically ahead of these rate meetings, use their judgment to anticipate market trends and adjust their strategies accordingly.

Bybit x 10x Research — Bitcoin Braces for Fed Chair Powell's Speech on Rate Cuts

Bybit x 10xResearch brings you with our weekly dose of market updates. Read on!

It’s challenging to stay on top of all the events and news influencing Bitcoin prices. The Bitcoin rally lost momentum in July when President Biden was replaced as the Democratic nominee on July 21, 2024, reducing the election odds for the crypto-friendly contender Trump. Polls indicate a close race between the Democrats and the perceived crypto-friendly Republicans, causing rising Bitcoin volatility.

Additional selling pressure from market makers and crypto funds was observed on Monday and Wednesday, adding to the liquidation concerns for Ethereum. Bitcoin Spot ETFs have seen continuous outflows, with no significant stablecoin inflows, raising alarm about the market's direction. Although stablecoin issuer Circle received $1.5 billion in inflows this week, it also had outflows of $1 billion the week before, resulting in only marginally stronger inflows overall. Without significant stablecoin inflow, Bitcoin and crypto markets are perhaps being driven purely by macro data points and the correlation with technology stocks.

Exhibit 1: Bitcoin (LHS) vs. Nasdaq (RHS)

Even if the hype around the carry trade fades, the downside risk for the Nasdaq remains, potentially affecting Bitcoin’s price due to increasing Bitcoin/Nasdaq correlations.

Additionally, the selection of Trump's candidate for vice president, who is perceived as anti–Big Tech, adds to the uncertainty. Political headwinds could impact tech stocks and the crypto tech sector. Economic uncertainty, inflation concerns and potential interest rate cuts will persist until September of this year.

On Tuesday, Bitcoin attempted a rebound but faced strong resistance at $56,000–$57,000, following the Bank of Japan's pause on rate hikes as it assured investors during its press conference. The potential downside risk for Nasdaq remains, and Bitcoin could see further declines.

Recent earnings reports from major U.S. tech companies have prompted investors to reassess their positions. Weak margins from companies like SMCI and Google's 5% decline in network advertising indicate economic strain. Additionally, weak U.S. consumer credit data, driven by negative credit card debt and soaring delinquencies, suggests a collapsing personal savings rate, impacting the fiat-to-crypto onramp.

Comparisons to the 2020–21 bull run should consider the absence of Covid stimulus checks, which previously fueled crypto trading. 

Historically, there’s a 44% chance of a U.S. recession in the first year of a new presidency, based on data collected since 1900, which could negatively impact stock prices and economic data. Despite declining consumer spending and advertisement revenue, the Fed's latest actions have signaled an acknowledgment of reduced inflation.

Upcoming vital events — including reports for the CPI on August 14, NVIDIA earnings on August 28, ISM

 on September 2 and labor market on September 6 — along with Fed Chair Powell’s speech at Jackson Hole on August 22–24 — will be critical in setting market expectations.

Traders are expected to closely monitor these events for signs of a potential price reversal, and to gauge the continuation of the Bitcoin bull market.

Bybit x 10xResearch — Market Closely Watches for Price Reversal as August CPI Looms

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Bybit x 10x Research: Bitcoin Braces for Impact: Fed Decision, Inflation Data and Election Debate

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Weakening Market Fundamentals and Declining Demand Signal a Potential Downturn for Bitcoin and Digital Assets in Sep 2024

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Bybit x 10x Research — Bitcoin Poised for Rally if U.S. Employment and Economic Growth Meet Expectations

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Bybit x 10x Research — Bitcoin Braces for Fed Chair Powell's Speech on Rate Cuts

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Bybit x 10xResearch — Market Closely Watches for Price Reversal as August CPI Looms

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