Former CEO BitMEX: Why Fed Rate Cuts Aren’t Boosting Bitcoin

• Hayes links Bitcoin’s struggles to a shift from Treasury bills to high-yield RRPs.
• Rate cuts have led to a $120B inflow into RRPs, tightening liquidity for risk assets.
• Higher RRP yields are siphoning capital away from Bitcoin, defying rate-cut benefits.

Arthur Hayes, the former CEO of BitMEX, has offered a thought-provoking analysis of why recent Federal Reserve rate cuts have not boosted Bitcoin prices as expected. Hayes points to a significant shift in financial markets, which he argues explains Bitcoin’s disappointing performance despite a favorable interest rate environment.

In his recent commentary on X, Hayes highlights that the anticipated rate cut by the Federal Reserve, as hinted by Chair Jerome Powell’s speech at Jackson Hole, has not translated into gains for Bitcoin. 

Hayes attributes this paradox to the growing prominence of reverse repurchase agreements (RRPs). These financial instruments, where securities are sold with a commitment to repurchase them at a higher price in the future, currently offer an interest rate of 5.3%. This rate is significantly higher than the 4.38% yield provided by Treasury bills, traditionally seen as a safe investment.

Consequently, significant money market funds have redirected their cash from Treasury bills to RRPs, resulting in a tighter market for risky assets like Bitcoin. This shift means less liquidity is available for investments in high-risk assets, including cryptocurrencies.

Moreover, Hayes points out that since the Fed signaled a potential rate cut in September, an additional $120 billion has flowed into RRPs. This influx contrasts sharply with the assumption that lower interest rates would encourage more investment in high-risk assets by making safer investments less attractive. Instead, the reverse is happening: money stays in the “parking lot” of RRPs rather than circulating through the economy.

Market participants expect lower interest rates to spur borrowing and spending, increasing market liquidity and boosting assets like Bitcoin. However, Hayes’ analysis suggests that the current environment contradicts this expectation. The higher yields on RRPs draw capital away from more volatile investments, thus creating a challenging scenario for Bitcoin.

Looking ahead, the CME Fed Watch tool indicates a 69% chance of a 25-basis-point rate cut and a 31% chance of a 50-basis-point cut at the Fed’s September 18 meeting. A more substantial rate cut could signal a more aggressive monetary policy stance, possibly leading to a more pronounced market reaction.

In addition, Hayes has previously emphasized Bitcoin’s potential as a hedge against global currency devaluation and rising inflation. Despite current market challenges, he believes Bitcoin remains a strong investment option amid growing economic instability and increased interest from institutional and retail investors.