Week by numbers
Last week in the cryptocurrency market has been downward trending. The price of the largest cryptocurrency, Bitcoin, fell by approximately four percent, price of the second-largest cryptocurrency, Ether, by about two percent, and the total value of other cryptocurrencies (excluding the largest stablecoins) decreased by about six percent.
Despite the overall downward trend in the market, there were some notable price increases in individual tokens during the week. Among the tokens available on Kvarn X trading platform, the biggest weekly gainers were Helium Network's HNT (+12%), Uniswap's UNI token (+10%), and Litecoin (LTC, +10%). Meanwhile, the biggest weekly declines were seen with Akash Network's AKT (-18%), Render (RNDR, -17%), and NEAR (-16%).
Market commentary
In recent weeks, our expectations for the short-term development of the cryptocurrency market have been quite cautious. This view has gained further support during past few days, as both Bitcoin's price and the total value of the cryptocurrency market (excl. biggest stablecoins)briefly fell below the local bottom seen in mid-August. The fact that this level did not hold as a support level, in our view, increases the likelihood of further downward movements.
Additional caution is also warranted by the Wednesday’s over two percent daily decline in the S&P 500 index, a significant move that may signal a decrease in market risk appetite.
A next notable level to watch is the twenty-day moving average, currently at 5503 points. A drop below this level would further indicate the start of a downtrend.
Furthermore, last week's local high in the S&P index at around 5652 points could be seen forming a "lower high" compared to the 5670-point peak in July, which would mark the first lower high since the summer of 2023. This would support the view that the “panic sale” at the beginning of August would have been not just a short correction but maybe a beginning of a broader market shift.
We want to emphasize that everything stated above is still somewhat early speculation, and no strong conclusions should be drawn yet. However, we want to bring these potential market reversal signals to our readers' attention so they can monitor for further supporting or contradicting evidence.
From the perspective of the cryptocurrency market, the temporary weakness in the stock market naturally gives reason for caution. It is hard to see strong upward movements in the cryptocurrency market as a whole until the stock market shows signs of increased risk appetite.
Even though the general trend in the cryptocurrency market were to be sideways or downward in the coming weeks, this does not mean that individual tokens couldn’t see strong price increases. Recent examples of this are Helium (HNT) and Litecoin (LTC), which just saw strong weekly gains despite a generally declining market. However, in a overall bearish market, special attention should be paid to token selection, as typically only a few of the strongest tokens can achieve positive price performance in the face of a possible downtrend.
Rate cuts expected soon
Federal Open Market Committee (FOMC) of the U.S. Federal Reserve will hold its next meeting in two weeks. These meetings are always highly anticipated and closely watched events, but this particular meeting has garnered special interest, as the Federal Reserve is expected to announce its first interest rate cut since spring 2020. Lowering the benchmark interest rate would signal the end of the rate hike cycle that began in 2022.
Currently, the market is 100% confident that an interest rate cut will occur during the September meeting, with a roughly 60% probability that the cut will be 25 basis points (0.25%). Notably, the market also assigns about a 40% probability that the rate will be cut by 50 basis points.
Federal Reserve's rate hikes were key drivers of the deep bear market in the cryptocurrency space in 2022, so there is naturally great interest in the rate cuts that are now expected to begin.
There have been various interpretations, and sometimes misunderstandings, regarding the effects of interest rate cuts. We would like to briefly comment on this matter.
In recent history, Federal Reserve rate cuts have often coincided with a downturn in the stock market. This has led some to conclude that rate cuts are inherently "bearish," and that markets should expect prices to decline when rate cuts begin.
It is not impossible that this heuristic would lead to the right expectations this time as well. However, it is important to also consider the Federal Reserve's dual mandate (price stability and employment) and the macroeconomic context in which the rate cut occurs.
Particularly in some recent cases, rate cuts have taken place in situations where there was a obvious, or at least expected, rapid and significant deterioration in the overall economic conditions (such as during the 2007 financial crisis and the 2020 Covid pandemic). In these instances, the interest rate was lowered reactively and rapidly to mitigate the worsening economic conditions and their ripple effects. Some analysts refer to these cuts as "recession cuts."
In such cases, the rate cut can be thought of more as a response to a market decline (or rather, it’s causes), rather than a trigger for it.
The situation may be somewhat different when the economic situation is not rapidly deteriorating, and the interest rate, which has been unusually high to curb inflation, is lowered preemptively toward a more typical level to prevent the high rate from causing negative effects on the economy. Many analysts call such rate cuts "normalization cuts," in contrast to the reactive "recession cuts" mentioned above.
Historically, "recession cuts" have often been accompanied by significant declines in stock prices. However, after "normalization cuts," stock market performance has often been quite positive.
Which type of rate cut is it this time? In our view, we cannot be entirely sure yet. There are no clear signs of "recession cut" conditions at the moment. However, the signals in recent months have perhaps weakened rather than strengthened the outlook for the U.S. economy, as evidenced by the increased probability of 50-basis-point cuts in market expectations since July.
The key to determining which type of rate cut cycle is in question this time will likely be the development of employment. A rapidly weakening employment situation and other signals that increase recession concerns would suggest a growing sense of caution among market participants, reflected in declining stock prices and, most likely, declining cryptocurrency prices. So far, there has been not obvious signs of that, but we have not seen any clear signals to rule them out either.
The size of the first interest rate cut itself will also carry significant weight. A 0.25% cut, as expected, would indicate that the Federal Reserve feels the situation is under control, while a one-time 0.50% cut would suggest urgency in lowering the interest rate. In our view, the information on the size of the rate cut, expected in two weeks, could be highly informative and should be noted by cryptocurrency investors as well.
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