US Federal Reserve, Washington DC

US Federal Reserve, Washington DC

The Impact of Fed Rate Cuts on Bitcoin

July 12th, 2019


It's been a rather interesting few weeks in the crypto markets - Federal Reserve Chair Jerome Powell gave subtle hints on instigating future rate cuts - potentially as much as 50 basis points, our Commander-in-Chief lashed out at Bitcoin and cryptocurrencies, and the Congressional Committee on Financial Services sent a letter to Facebook concerning its Libra project.

This rate cut, if implemented, is rather puzzling - GDP growth is robust, Unemployment is as low as its ever been, and Inflation is hovering around the 2% target YoY. Powell, as is characteristic of all Fed Chairs, spoke cryptically on the underlying reasoning for the upcoming cuts. Furthermore, other central banks may follow the Fed's actions.

Reasoning aside, the consequences of a Fed rate cut are lower borrowing costs, easier credit, and ultimately increased flow of funds towards speculative assets, namely BTC and cryptocurrencies in general. Thus any signal of impending rate cuts can be viewed as a bullish signal for crypto.

President Trump's comments should only strengthen the resolve of current crypto holders, and the Congressional letter to Facebook is unsurprising, as any currency FB decides to implement will have to be heavily regulated.

Meanwhile, BTC is in constant danger of regressing ~30% or more after any sudden price rise (12x to date). To mitigate this, a simple protection strategy is to purchase ATM puts after every price increase. The premium can be offset by simultaneously selling a lower strike put. If a pure volatility, market-neutral play is desired as opposed to simply hedging for protection, a call and put of identical strikes can be purchased - this will ensure downside protection as well as capture any increase in volatility regardless of price direction.

BTC IV however, remains considerably high, ~100% for Dec '19 ATM calls and puts, making options currently expensive.

Lastly, the attempts to fundamentally value Bitcoin have all been rather head-scratching. The obvious primary value drivers are 1.) Inflation resistance/Deflationary, assisting those in hyperinflationary economic environments such as Venezuela, and 2.) Censorship resistance, impacting countries where the government can remove one's wealth without notice (Russia, China, etc.). We have yet to see any valuation papers attempt to quantify let alone address these characteristics. The ineptness of MV=PQ meanwhile was soundly revealed by us here, back in early 2018.

Until next time.

Brian Koralewski is the Founder of Austere Capital — a Digital Asset Advisory and Consulting Firm.

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