SUMMARY

• The Fed is anticipated to start its rate-cutting cycle next week, but a significant cut could signal economic concerns rather than reassurance, potentially impacting risk assets like Bitcoin, according to 10X Research.
• Traders currently estimate less than a 30% probability of a 50 basis point rate cut occurring next week.

Friday’s U.S. jobs report has set the stage for the Federal Reserve (Fed) to possibly start its rate-cutting cycle as early as next week. However, a noteworthy cut of 50 basis points (bps) might initially weigh on risk assets, including cryptocurrencies like Bitcoin, according to 10x Research. The Fed regularly makes incremental rate changes of 25 bps, but bigger cuts can flag increased economic concerns or a sense of urgency, as evidenced by the 50 bps and 75 bps hikes amid the 2022 tightening cycle aimed at controlling inflation.

A 50-bps rate cut may infer increased economic uneasiness or an acknowledgment of falling behind in addressing an economic slowdown. This potential move may lead investors to decrease their exposure to risk assets such as Bitcoin and stocks. Markus Thielen, founder of 10x Research, demonstrated that whereas such a cut might flag more profound economic stresses, the Fed’s primary objective remains moderating economic dangers rather than overseeing market responses. Thielen, who precisely anticipated Bitcoin’s rally to $70,000 in the first quarter, noted that current market expectations appear a nearly 30% likelihood of a 50-bps cut to the 4.75%-5% range next week.

Thielen’s viewpoint aligns with the broader view among market experts, who propose that the Fed might steer off starting its rate-cutting cycle with a significant 50 bps decrease. Macro trader Craig Shapiro emphasized that whereas liquidity-dependent markets might thrust for a 50-bps cut, the central bank may pick a more measured approach to avoid activating a market frenzy. Shapiro highlighted that risk assets may proceed to correct until the Fed makes more noteworthy reductions if necessary.

Historically, the commencement of a rate-cutting cycle, notwithstanding of its size, does not always lead to prompt gains in asset prices. The expected Fed easing has been a driving factor behind Bitcoin’s rise from $20,000 in January 2023. This raises the question of whether such a rate cut is already calculated into Bitcoin’s current price levels, possibly impacting market dynamics in the coming weeks.