Bitfinex analysts warn that Bitcoin could drop by up to 20% as the Federal Reserve’s upcoming interest rate decision introduces uncertainty.
The price of Bitcoin (BTC) might be on the verge of a 20% decline, as Bitfinex analysts warn that the cryptocurrency’s future is highly contingent on this month’s Federal Reserve interest rate decision.
In a research report published on Sept. 2, the analysts attributed Bitcoin’s recent 32% surge to speculation of a dovish Fed stance. However, they note that the anticipated rate cut could “significantly influence both Bitcoin’s short-term volatility and long-term trajectory.”
A 25 basis point cut is likely to signal the beginning of a typical easing cycle, which could lead to long-term price appreciation for Bitcoin as liquidity increases and recession fears ease.
Bitfinex analysts
The analysts further warned that a more “aggressive” 50 basis point cut might cause an immediate price spike but could be followed by a “correction as recession concerns escalate.”
In the past week, market dynamics have shifted. Spot holders are de-risking now, the analysts say, adding that perpetual market speculators are attempting to “buy the dip,” which can be seen in “significant long open interest on BTC perpetuals.”
Bitcoin faces turbulent month
Analysts predict that Bitcoin could face a 15-20% decline following a rate cut, with a potential bottom between $40,000 and $50,000. This forecast is based on historical data showing that cycle peaks in percentage returns typically diminish by 60-70% each cycle, alongside a reduction in average bull market corrections. However, they emphasize that changing macroeconomic conditions could quickly alter this outlook.
Historically, September has been a turbulent month for Bitcoin, with an average return of -4.78% and peak-to-trough declines of around 24.6%. The analysts note that this volatility, coupled with the risk of a “sell-the-news” reaction post-rate cut, could create “both risks and opportunities for traders.”
The Federal Reserve will meet on Sept. 17 and 18, with the majority of analysts and experts expecting an interest rate cut. However, it’s unclear how significant the change might be, as the U.S. economy shows signs of steady disinflation and strong consumer spending.
Bitcoin price held steady above $60,000 on Thursday, Aug. 29, even as its exchange-traded funds saw two consecutive days of outflows.
Data from SoSoValue shows that Bitcoin (BTC) ETFs lost $105.19 million in assets on Wednesday after shedding $127 million the previous day. These funds have accumulated $17.85 billion in assets, with most of the money coming from institutional investors.
Another potential catalyst is that the amount of coins held in exchanges has dropped to the lowest point this year. According to CoinGlass, exchanges held 2.38 million coins on Aug. 29, down from 2.4 million in Aug. 27 and last month’s high of 2.50 million.
Falling Bitcoin reserves often indicate low liquidity in the market and suggest that most investors are no longer moving their coins from wallets to exchanges, a key step in liquidation. For example, Bitcoin reserves surged in July when the German government liquidated its reserves.
The falling US dollar and growing US public debt are other potential catalysts for Bitcoin. The US dollar index, which measures the price of the greenback against a basket of currencies like the euro, pound, and Swiss franc, fell to $101.50, down over 4.7% from its highest level this year. The US dollar has pulled back after Federal Reserve chief Jerome Powell hinted at possible rate cuts in the September meeting.
The US dollar has pulled back after the Federal Reserve chair hinted that the bank will start cutting rates in its September meeting.
Additionally, the US public debt has continued rising and is moving to unsustainable levels, making Bitcoin a viable alternative. Data by US Debt Clock shows that the national debt jumped to over $35.2 trillion, or 123.2% of the GDP. Annual interest on this debt has jumped to over $920 billion.
The same trend is occurring globally, with liquidity reaching a record high of $95 trillion. As a result, more institutions and retail investors may turn to alternatives, first to gold, and then to Bitcoin.
Meanwhile, the options market is pointing to a potential Bitcoin rebound, potentially to $90,000 later this year. Additionally, Bitcoin funding rate has dropped to -0.0011%, pointing to more upside.
Driven by positive market sentiment, crypto investment products saw their largest inflows in weeks, data from CoinShares shows.
Crypto investment products attracted over $530 million in inflows last week, the highest in five weeks, as investors reacted to dovish signals from Federal Reserve Chair Jerome Powell at the Jackson Hole Symposium, according to a report by CoinShares head of research James Butterfill.
He noted that even though trading volumes were lower than in recent weeks, they “remained high, reaching $9 billion for the week” as Powell’s remarks, hinting at a potential interest rate cut as early as September, spurred significant market activity.
While the U.S. led the inflows with $498 million, Hong Kong and Switzerland also saw gains of $16 million and $14 million, respectively. Butterfill added that Germany bucked the trend with outflows totaling $9 million, leaving it as “one of the only countries with net outflows year-to-date.”
Bitcoin (BTC) was the primary beneficiary, with inflows of $543 million, underscoring its sensitivity to shifts in interest rate expectations, with the bulk of BTC inflows occurring on Friday, Aug. 23, immediately following Powell’s comments, Butterfill added.
Although Ethereum (ETH) saw contrasting movements with outflows of $36 million last week, new Ethereum ETFs have gained traction, attracting $3.1 billion in inflows over the past month, the CoinShares head of research says, noting that those inflows were “partially offset by outflows from the Grayscale Trust of $2.5 billion.”
Bitcoin and altcoins staged a strong comeback after Jerome Powell, the Federal Reserve chairman, hinted that interest rates would start falling in September.
Bitcoin (BTC) jumped to $64,000 on Aug. 24 while Ethereum (ETH) pushed to $2,765. The total market cap of all coins rose by almost 5% to over $2.26.
The same trend happened in the stock market, where key indices like the Dow Jones, S&P 500, and the Nasdaq 100 approached their all-time highs. Still, there is a risk that gains in the stock and crypto market will be short-lived.
Buy the rumor, sell the news
The market was already factoring in rate cuts for September after the recent weaker-than-expected U.S. jobs numbers. The probability in the Fed Rate Monitortool has been above 80% in the past three weeks.
Therefore, Powell’s statement was just a clue as to what to expect at the next meeting, scheduled for Sept. 18. As such, with a rate cut fully priced in, there is a risk that stocks and crypto will retreat as investors sell the news.
This trend has happened several times. For example, Bitcoin dropped by almost 10% after halving, while Ether has fallen by double digits since the Securities and Exchange Commission approved ETFs.
Stocks typically drop sharply after the Fed starts cutting rates. Geiger Capital, a conservative-leaning commentator on X.com, recalled 2001 and 2002 as examples.
🔸First Rate Cut – Jan 3, 2001 – S&P 500 fell ~39% next 448 days – Unemployment rose another 2.1%
🔸First Rate Cut – Sep 18, 2007 – S&P 500 fell ~54% next 372 days – Unemployment rose another 5.3%
On the positive side, stocks have done well when the Fed starts cuts, as we saw in 2020 during the early stages of the Covid-19 pandemic.
Another positive is that these cuts are coming at a time when American companies are reporting strong earnings growth.
Money markets are seeing inflows
Another reason why cryptocurrencies may retreat after the Fed starts cutting is that low-risk money market funds are still seeing inflows.
Data shows that these funds had over $90 billion in net inflows in the first half of August even as expectations of rate cuts rose. These funds now hold over $6.2 trillion in assets.
The theory has been that risky assets like crypto and stocks will see more inflows as money market investors capitulate.
This rotation will likely happen, but it will take time since interest rate cuts will likely be gradual.
Bitcoin rebounded to $64,000 after falling to $49,000 earlier this month. However, this price action is still not yet a complete breakout because it has remained in this range in the past few months.
Notably, Bitcoin has been forming a series of lower highs since March. The first high was at $73,800 followed by $72,000 and $70,000. As such, a complete bullish breakout will be confirmed if the coin clears the first high at $73,800. Before that happens, there is a risk that Bitcoin will resume the bearish trend.
On the positive side, the series of lower highs and lower lows has resulted in a falling broadening wedge pattern, a popular bullish sign.
The stage looks set for Bitcoin to surpass its previous all-time high, fueled by a surge in global liquidity, several macroeconomic analysts argue.
In recent weeks, the global macro financial outlook has been showing signs of a shift. Over the weekend, Goldman Sachs economists announced that they had lowered their estimations of the probability of a U.S. recession in 2025 from 25% to 20%.
This change came after the latest U.S. retail sales and jobless claims data were released, which suggested that the U.S. economy might be in better shape than many had feared.
The Goldman Sachs analysts added that if the upcoming August jobs report — set for release on Sept. 6 — continues this trend, the likelihood of a recession could drop back to their previously held marker of 15%.
The possibility of such a development has sparked confidence that the U.S. Federal Reserve might soon cut interest rates in September, possibly by 25 basis points.
The potential rate cuts have already begun to impact the markets, with U.S. stock indices, including the S&P 500, Nasdaq Composite, and Dow Jones Industrial Average, recording their largest weekly percentage gains of the year for the week ending on Aug. 16.
Alongside this relatively positive news for the U.S. economy, global liquidity has begun to rise. Historically, increasing liquidity and easing recession fears have often been catalysts for bullish trends in the crypto space.
So, let’s take a closer look at what’s happening globally and how these macroeconomic shifts could impact Bitcoin (BTC) and the entire crypto market in the coming weeks and months ahead.
Liquidity surge across global markets
To understand where BTC might be headed, we need to delve into the mechanisms behind the current liquidity surge and how it could impact the broader markets.
The U.S. liquidity flood
In the U.S., the Treasury appears poised to inject a massive amount of liquidity into the financial system. BitMEX cofounder and well-known crypto industry figure Arthur Hayes stated in a recent Medium post that this liquidity boost could push Bitcoin past its previous all-time high of $73,700. But why now?
One possible explanation is the upcoming presidential elections. Maintaining a strong economy is crucial, and this liquidity injection could be a way to ensure favorable conditions as the election approaches.
But how exactly is this liquidity going to be injected? The U.S. Treasury and the Fed have several powerful tools at their disposal, as Hayes lays out in his analysis.
First, there’s the overnight reverse repurchase agreement mechanism, or RRP, the balance of which currently stands at $333 billion as of Aug. 19, down significantly from a peak of over $2.5 trillion in December 2022.
Hayes explains that the RRP should be looked at as a major pool of “sterilized money” on the Fed’s balance sheet that the Treasury is evidently looking to get “into the real economy” — aka add liquidity. The RRP represents the amount of Treasury securities that the Fed has sold with an agreement to repurchase them in the future. In this process, the buying institutions — namely money market funds — earn interest on their cash overnight.
Overnight revers repurchase agreements | Source: FRED
As Hayes points out, the drop in overnight RRP over the past year indicates that money market funds are moving their cash into short-term T-bills instead of the RRP, as T-bills earn slightly more interest. As Hayes notes, T-bills “can be leveraged in the wild and will generate credit and asset price growth.” In other words, money is leaving the Fed’s balance sheet, adding liquidity to the markets.
The Treasury also recently announced plans to issue another $271 billion worth of T-bills before the end of December, Hayes noted.
But that’s not all. The Treasury could also tap into its general account, the TGA, which is essentially the government’s checking account. This account holds a staggering $750 billion, which could be unleashed into the market under the guise of avoiding a government shutdown or other fiscal needs. The TGA can be used to fund the purchase of non-T-bill debt. As Hayes explains: “If the Treasury increases the supply of T-bills and reduces the supply of other types of debt, it net adds liquidity.”
If both of these strategies are employed, as Hayes argues, we could see anywhere between $301 billion (the RRP funds) to $1 trillion pumped into the financial system before the end of the year.
Now, why is this important for Bitcoin? Historically, Bitcoin has shown a strong correlation with periods of increasing liquidity.
When more money is sloshing around in the economy, investors tend to take on more risk. Given Bitcoin’s status as a risk asset — as well as its finite supply — Hayes argues that the increased liquidity means a bull market could be expected by the end of the year.
If the U.S. follows through with these liquidity injections, we could see a strong uptick in Bitcoin’s price as investors flock to the crypto market in search of higher returns.
China’s liquidity moves
While the U.S. is ramping up its liquidity efforts, China is also making moves — though for different reasons.
According to a recent X thread from macroeconomic analyst TomasOnMarkets, the Chinese economy has been showing signs of strain, with recent data reportedly revealing the first contraction in bank loans in 19 years. This is a big deal because it indicates that the economic engine of China, which has been one of the world’s main growth drivers, is sputtering.
🇨🇳 China liquidity injections picking up
Stimulus from the People’s Bank of China (PBoC) is picking up.
Modest-sized Reverse Repo injections are continuing and total PBoC liquidity injections are spiking above my “pay attention” line ($65bn), but are yet to conclusively remain… pic.twitter.com/n0Md8Kga6D
To counteract this pressure, the People’s Bank of China has been quietly increasing its liquidity injections. Over the past month alone, the PBoC has injected $97 billion into the economy, primarily through the very same reverse repo operations.
While these injections are still relatively small compared to what we’ve seen in the past, they’re crucial in a time when the Chinese economy is at a crossroads.
But there’s more at play here. According to the analyst, the Chinese Communist Party’s senior leadership has pledged to roll out additional policy measures to support the economy.
These measures could include more aggressive liquidity injections, which would further boost the money supply and potentially stabilize the Chinese economy.
Over the past few weeks, the yuan has strengthened against the U.S. dollar, which could provide the PBoC with more space to maneuver and implement additional stimulus without triggering inflationary pressures.
The big picture on global liquidity
What’s particularly interesting about these liquidity moves is that they don’t seem to be happening in isolation.
Jamie Coutts, chief crypto analyst at Real Vision, noted that in the past month, central banks, including the Bank of Japan, have injected substantial amounts into the global money base, with the BoJ alone adding $400 billion.
The central banks are capitulating, the liquidity spigots are opening, and #Bitcoin is about to go much higher.
My composite global liquidity momentum model (MSI), has provided the first Bullish regime signal since November 2023. Recall that Bitcoin rallied 75% from Nov to… pic.twitter.com/ovF6qSHX8c
When combined with the $97 billion from the PBoC and a broader global money supply expansion of $1.2 trillion, it appears that there is a coordinated effort to infuse the global economy with liquidity.
One factor that supports this idea of coordination is the recent decline in the U.S. dollar. The dollar’s weakness suggests that the Federal Reserve might be in tacit agreement with these liquidity measures, allowing for a more synchronized approach to boosting the global economy.
Jamie added that if we draw comparisons to previous cycles, the potential for Bitcoin to rally is very high. In 2017, during a similar period of liquidity expansion, Bitcoin rallied 19x. In 2020, it surged 6x.
While it’s unlikely that history will repeat itself exactly, the analyst argues that there’s a strong case to be made for a 2-3x increase in Bitcoin’s value during this cycle — provided the global money supply continues to expand, and the U.S. dollar index (DXY) drops below 101.
Where could the BTC price go?
On Aug. 5, Bitcoin and other crypto assets suffered a sharp decline due to a market crash triggered by growing recession fears and the sudden unwinding of the yen carry trade. The impact was severe, with Bitcoin plummeting to as low as $49,000 and struggling to recover.
As of Aug. 19, Bitcoin is trading around the $59,000 mark, facing strong resistance between $60,000 and $62,000. The key question now is: where does Bitcoin go from here?
BTC 1-day price chart over the past 6 months | Source: crypto.news
According to Hayes, for Bitcoin to truly enter its next bull phase, it needs to break above $70,000, with Ethereum (ETH) surpassing $4,000. Hayes remains optimistic, stating, “the next stop for Bitcoin is $100,000.”
He believes that as Bitcoin rises, other major crypto assets will follow suit. Hayes specifically mentioned Solana (SOL), predicting it could soar 75% to reach $250, just shy of its all-time high.
Supporting this view is Francesco Madonna, CEO of BitVaulty, who also sees the current market environment as a precursor to an extraordinary bullish phase.
Madonna highlighted a pattern he has observed over the past decade: during periods of uncertainty or immediate liquidity injections, gold typically moves first due to its safe-haven status.
Recently, gold reached its all-time high, which Madonna interprets as a leading indicator that the bull market for risk assets, including Bitcoin, is just beginning.
2/3 Gold #Gld saw that and just reached its ATH . By analyzing the last 10 years behaviour , Gold typically moves first during periods of uncertainty or immediate liquidity injections due to its safe-haven status. pic.twitter.com/5a3AUR4qAf
Madonna points out that after gold peaks, the Nasdaq and Bitcoin typically follow, especially as liquidity stabilizes and investors start seeking higher returns in growth assets.
Given that gold has already hit its all-time high, Madonna believes Bitcoin’s recent consolidation around $60,000 could be the calm before the storm, with $74,000 being just the “appetizer” and $250,000 potentially within reach.
4/4 This pattern has repeated itself over the last decade and more , with gold often being a leading indicator of liquidity changes. The fact #Gld reached its ATH screams the bull market just started ! 74k was just the appetizer, #Bitcoin at 250k in sight ! pic.twitter.com/SV0a1GreSL
As Coutts stated in a recent X post, the expansion of the money supply is a condition of a credit-based fractional reserve system like the one we have.
Without this expansion, the system risks collapse. The analyst argues that this “natural state” of perpetual growth in the money supply could be the catalyst that propels Bitcoin, alongside other growth and risk assets, into its next major bull market.
With the U.S., China, and other major economies all injecting liquidity into the system, we’re likely to see increased demand for Bitcoin as investors seek assets that can outperform traditional investments.
If these liquidity measures continue as expected, Bitcoin could be on the verge of another key rally, with the potential to break through its previous all-time high and set new records.
Bitcoin and most altcoins traded sideways on Aug. 19 as traders await the release of this week’s Federal Reserve minutes and the upcoming Jackson Hole symposium.
Monero, Polkadot, and Polygon rose
Monero (XMR), the largest privacy coin, was among the best performers, rising for three consecutive days to reach a high of $156, its highest level since Aug. 14. This uptick comes as Binance prepares to convert all XMR tokens in its ecosystem to Tether (USDT) as part of its delisting process.
Polkadot (DOT) and Polygon (MATIC) were also among the top gainers as both coins have now risen for four consecutive days. Polygon’s rise is linked to the upcoming Sep. 2 conversion of the MATIC token to POL. Initially, POL will serve as the the native gas and staking token and will later play a key role in the AggLayer.
Polkadot’s rally coincided with the start of the Web3 Summit in Berlin, a significant event in the ecosystem featuring over 60 speakers.
🔦 ✨ Spotlight on: Web3 Summit ’24@Web3summit is back in Berlin from August 19-21, with insightful talks and opportunities to network, build, and more.
The crypto industry has been underperforming compared to the stock market recently, largely due to the lack of a clear narrative. Important events, such as Exchange Traded Fund approvals and Bitcoin (BTC) halving, have already occurred, leaving the market in a holding pattern.
FOMC minutes and Jackson Hole Symposium
A potential catalyst for these tokens could be the Federal Reserve, which might begin lowering interest rates as early as September. The Fed will release the minutes of its July meeting on Wednesday, which could provide more insight into the committee’s deliberations.
However, the most significant central bank-related event will be the annual Jackson Hole Symposium in Wyoming, where Fed officials, global central bankers, and economists gather to discuss economic issues.
With the Fed not meeting in August, this symposium will give Fed Chair Jerome Powell an opportunity to signal whether the bank will cut rates in September. Historically, assets like stocks and cryptocurrencies have shown volatility during this meeting.
This time, however, movements may be more subdued since many economists expect the Fed to cut rates by 0.25%. The central bank is particularly concerned about the labor market, which has shown signs of weakening, with the jobless rate rising to 4.3% in July and wage growth slowing to 3.4%.
Recently, cryptocurrencies have reacted mildly to Fed actions. For instance, Bitcoin dropped by just 2% following the Fed’s last decision on July 31. Before that, it dipped by 3% after the June meeting.
Annual consumer prices retreated in August, raising hopes that the Federal Reserve will start cutting interest rates in its September meeting.
Cryptocurrencies and U.S. stocks continued rising on Wednesday, Aug. 14 after the release of July’s inflation report. THORChain (RUNE) was the top gainer of the day as it jumped by 12%. It was followed by Toncoin (TON), Notcoin (NOT), and Celestia (TIA), which rose by over 10%.
Toncoin’s token climbed to $7.27, its highest point since July 20 and 51% above its lowest point this month. Similarly, Notcoin, the popular tap-to-earn token, rose to $0.0128, while Celestia increased to $6.60. Other major coins like Bitcoin (BTC), Ethereum (ETH), and Cardano (ADA) were also in the green.
US inflation slowed in July
According to the Bureau of Labor Statistics, the headline Consumer Price Index (CPI) slowed to 2.9%, while the core CPI dropped from 3.3% in June to 3.2% in July. However, both figures rose slightly by 0.2% on a month-on-month basis.
The U.S. CPI data came a day after the statistics agency published weaker-than-expected producer price index numbers, leading to a strong rebound in American equities. The Dow Jones and the Nasdaq 100 indices rose by over 400 points, while the U.S. dollar index slipped.
These numbers imply that the Federal Reserve will likely start cutting rates in its September meeting. In a Bloomberg interview, David Rubenstein, the billionaire founder of Carlyle, predicted that the Fed would cut by 0.25% instead of 0.50%, citing the U.S. election period.
Cryptocurrencies like Celestia, Notcoin, and Toncoin could receive a boost from rate cuts since they tend to push investors toward riskier assets. This dynamic helps explain why most coins rallied during the Covid pandemic.
TON $40 million venture fund
Toncoin and Notcoin also rallied after the TON Blockchain, backed by Telegram, launched a new $40 million fund to support networks in the ecosystem.
The developers hope these funds will attract new developers and those migrating from other blockchains like Ethereum and Solana. This ecosystem fund comes at a time when the Toncoin ecosystem is booming, supported by games and tap-to-earn platforms like Hamster Kombat and TapSwap.
TON Blockchain also has nearly $600 million locked in its DeFi ecosystem, with STON.fi, DeDust, and Tonstakers being the biggest players on the platform.
Ecosystem funds are common in the blockchain industry. In June, the Manta Foundation launched its $50 million fund. Other chains with similar funds include Base, Avalanche, and Sui.
Celestia’s rally was mainly driven by investors buying the dip, as there was no specific news about the network.
The Ondo Finance token retreated by over 6% on Tuesday as traders focused on the upcoming U.S. Consumer Price Index (CPI) data.
Ondo (ONDO) was trading at $0.7345, down 50% from its highest point this year, bringing its market cap to $1 billion.
The biggest macro news of this week will be Wednesday’s U.S. CPI data, which is crucial to the Federal Reserve’s dual mandate.
The average estimate among economists is that the headline CPI rose from -0.1% in June to 0.2% in July, while the core CPI moved from 0.1% to 0.2%. If these estimates are accurate, it will break a three-month trend where inflation had been retreating.
The CPI is expected to remain steady at 3.0%, while the core CPI is projected to have slightly decreased to 3.2%. These figures are still above the Federal Reserve’s target of 2.0%, suggesting that inflation is proving more stubborn than expected.
Despite this, the Fed seems to be taking a labor-first approach, focusing on the deteriorating job market, with the unemployment rate rising to 4.3%.
As a result, the odds of a Fed rate cut in September have increased in recent weeks. The debate now centers on the size of the cut, with the CME FedWatch showing a 51% probability of a 0.50% cut and the remainder predicting a 0.25% reduction.
Ondo Finance is exposed to Fed cuts
Federal Reserve interest rate cuts will impact all cryptocurrencies and stocks, but Ondo Finance may be particularly vulnerable due to its business model, which relies heavily on interest rates.
Ondo provides a tokenization platform where investors can purchase U.S. Dollar Yield (USDY) and U.S. Treasuries assets (OUSG). Holders of USDY and OUSG earn rewards every month.
USDY has an annual return rate of 5.35%, while OUSG yields 4.96%, making them more attractive than traditional stablecoins like Tether (USDT) and USD Coin (USDC). These yields are generated by investing in bank deposits and short-term U.S. Treasuries.
Ondo Finance’s assets have grown, with USDY and OUSG holding $342 million and $226 million in assets, respectively. However, recent data from DeFi Llama shows that the rate of growth has slowed.
Ondo DeFi TVL growth has stalled | Source: DeFi Llama
Given this, Ondo’s ecosystem could shrink when the Fed starts cutting interest rates, as investors may seek higher-yielding assets elsewhere.
This trend is also expected to affect the broader money market fund industry, which has accumulated over $6.1 trillion in assets as investors capitalize on higher interest rates. Nevertheless, USDY and OUSG tokens are likely to remain more appealing than Tether and USDC, which don’t pay interest, suggesting that any outflows might be gradual.
There is often a disconnect between a blockchain’s fundamentals and its token price. For instance, Arbitrum (ARB) has a market cap of $1.9 billion while Cardano (ADA) is valued at $12 billion. Arbitrum has a highly engaged ecosystem, with its DEX platforms having the third market share after Ethereum and Solana. Cardano, on the other hand, does not have an active ecosystem in DeFi and other industries.
Given this, there is a possibility that the Ondo Finance token could rebound even if investors start moving out of its USDY and OUSG assets.
Bitcoin’s recent rally could be setting the stage for a downturn, as several indicators suggest. The recent distribution of BTC from Mt. Gox, coupled with the German government’s large-scale sell-off, initially dampened Bitcoin’s price but led to a temporary recovery. However, metrics such as the Net Unrealized Profit/Loss and Stochastic RSI are signaling potential declines ahead. The article examines how these factors might affect Bitcoin’s future movements.
Table of Contents
Mt. Gox distributions and German government sell-offs
July and August brought a cascade of bad news for Bitcoin (BTC). The month began with the turmoil initiated by the German government’s large-scale BTC liquidation and the commencement of Mt. Gox’s distribution process.
The initial wave of selling from Germany triggered a downtrend in Bitcoin’s price, which reached a low of $53,542 on July 5.
Source: Glassnode. Mt. Gox and German government BTC balance change, June-August 2024
The decline was further intensified when Mt. Gox released 2,701 BTC. By then, Germany had already offloaded 9,332 BTC during its selling spree. After July 5, Bitcoin’s market began to recover, even though Germany sold another 59,190 BTC. By July 12, the price had climbed to $57,889, marking an over 8% recovery.
The recovery shows that after the initial selling pressure eased, Bitcoin became more appealing to investors. The market’s ability to absorb the government’s selling pressure hinted at a growing demand. Later, news that Germany had sold all the BTC held in its wallets led to further price appreciation.
Even the larger Mt. Gox movement of 49,079 BTC failed to halt the upward trend, which saw a 26% increase from the July 5 low. Although subsequent distributions from Mt. Gox did create short-lived dips in the market, they did not stop the overall recovery.
1/ @krakenfx has successfully distributed #Bitcoin and Bitcoin Cash from the @mtgox estate back to creditors.
It’s been nearly a decade since Kraken was selected by the Trustee to facilitate the investigation and return of client funds. It was our privilege and it was our duty. pic.twitter.com/ptKexzN4gm
The psychological factor likely played a big role here. Those receiving BTC from Mt. Gox had not been holding the cryptocurrency over the years by choice; they simply had no access to it until the recent distributions. Over time, many may have realized that keeping BTC could be more beneficial than selling it right away. The mindset shift likely came from Bitcoin’s past price highs in 2017, 2021, and even 2024. If they had had their BTC during those peaks, many might have sold their holdings. Instead, the forced delay unintentionally positioned them as long-term holders, which worked to their advantage. The perspective is supported by the market’s reaction to the distributions. The minor 4% drop observed after Kraken and Bitstamp began their distributions on July 24 was quickly absorbed, indicating that the selling pressure from these recipients was relatively low.
The pattern suggests that future distributions of the remaining 65,476 BTC from Mt. Gox are unlikely to cause significant market disruptions. Any potential disruptions are expected to be quickly absorbed by the market, as most recipients are likely to hold rather than sell their assets.
Entity-Adjusted Dormancy Flow as a predictor of Bitcoin market bottoms
Entity-Adjusted Dormancy Flow (EADF) measures the ratio between the current market capitalization and the annualized dormancy value. Dormancy value is the average number of days that each BTC remains dormant (held without being moved) multiplied by the amount of BTC moved on that day and then converted into USD. The metric provides insight into the behavior of long-term holders by indicating how much “older” Bitcoin is being spent or moved in the market.
Source: Glassnode. Entity-adjusted dormancy flow of BTC, 2010-2024
This tool has proven indispensable in timing market lows and assessing whether the Bitcoin market remains within typical parameters during a bullish trend or is shifting toward a bearish phase.
Each time EADF drops into the green zone, between $170 and $250, it signals a market low. The lower band, especially around $170, has consistently predicted Bitcoin’s price bottoms with good accuracy. Recently, on August 5, EADF hit a low of $184, which, based on past data, likely indicates Bitcoin has reached its bottom. The following upward movement of EADF suggests the start of a recovery phase, which, if patterns hold, could lead to an appreciation of Bitcoin’s price in the near future.
Source: Glassnode. Entity-adjusted dormancy flow of BTC, year-to-date
Net Unrealized Profit/Loss as a predictor of Bitcoin market tops
Net Unrealized Profit/Loss (NUPL) is a metric that reflects the overall sentiment of Bitcoin holders by quantifying the difference between the total amount of Bitcoin that is in profit (relative unrealized profit) and the total amount of Bitcoin that is at a loss (unrealized loss). NUPL, therefore, represents the net result of these two figures, indicating whether the market, on average, is in a state of profit or loss.
Source: Glassnode. Net unrealized profit/loss of BTC, 2010-2024
Historically, every time NUPL has risen above 0.4, it has signaled that Bitcoin may be entering a phase of overvaluation. However, this does not necessarily mean that Bitcoin’s price will immediately start to decline. Previously, from 2010-2011, 2013-2014, 2017-2018, and 2020-2021, NUPL remained above the 0.4 threshold for extended periods—sometimes nearly a year—before eventually dropping below it, marking the end of a bullish phase.
Given the current market conditions, it is possible that Bitcoin may stay in the NUPL zone above 0.4, occasionally dipping barely below it, until a market top is reached, which could occur around 2025. However, a closer resemblance might be drawn to the scenario in 2019.
During that year, NUPL reached 0.4 in June and remained at that level until August, after which it began to decline. A key factor influencing this was the Federal Reserve’s decision to lower interest rates starting on July 31. The rate cut, coupled with the subsequent halt in further cuts or hikes, may have contributed to the decline in NUPL and the corresponding downtrend in Bitcoin’s price.
Source: TradingView. BTC price vs. interest rates, 2015-2024
By March 2020, NUPL had dropped below 0, coinciding with the onset of the COVID-19 pandemic and the Federal Reserve’s decision to stop adjusting rates for a prolonged period. Once the Federal Reserve ceased cutting rates, both Bitcoin’s price and NUPL reversed their downward trends and began to rise again. With the Federal Reserve expected to cut rates in September, a similar pattern to 2019 might occur, possibly leading to a decline in Bitcoin’s price.
Source: CMEGroup. Federal Reserve rate target probabilities, September 18 2024
Stochastic Relative Strength Index patterns in Bitcoin market cycles
Stochastic Relative Strength Index (Stoch RSI) is a momentum indicator that traders use to assess the potential direction of an asset’s price by comparing the current closing price to its price range over a specific period. It is an oscillator that measures the level of the RSI relative to its high-low range over a set period rather than comparing price levels. This makes it more sensitive to recent price changes and provides information about potential overbought or oversold conditions.
The Stoch RSI oscillates between 0 and 1, with readings above 0.8 typically indicating overbought conditions and readings below 0.2 indicating oversold conditions. However, rather than just looking at whether the indicator is overbought or oversold, a more nuanced approach involves examining the behavior of the Stoch RSI as it breaches these levels.
Historically, when the BTC’s Stoch RSI has breached its upper band (downward trend), then fallen below the lower band (oversold), and later breached the lower band again on its way upward, Bitcoin’s price has typically experienced a decline. On average, from the open price on the day of the first breach below the upper band to the open price on the day of the first upward breach of the lower band, Bitcoin has seen a decline of -22.89%.
This method is preferred because it avoids the pitfalls of false signals. Simply relying on the Stoch RSI topping or bottoming can be misleading, as the indicator might give false bottoms where it briefly rises before dropping again. By waiting for the sequence of breaches—first of the upper band, then the lower band, and finally the upward breach of the lower band—the analysis achieves a higher success rate, albeit at the cost of potentially being late to the trend.
However, if the anomaly of the 2014-2015 period is excluded, the average drawdown is significantly steeper, around -48.45%. For simplicity, this figure can be rounded to a 50% average drawdown.
Currently, examining the monthly view, Bitcoin has declined by -10.2% from the open prices, which indicates that if the historical trend holds, the price could drop further to around $36,000 this year. Nonetheless, there is an alternative scenario similar to what occurred during the last halving cycle in 2020.
In 2020, the Stoch RSI did not breach the lower band but instead showed a pattern where it breached the upper band, then the middle band, and finally breached the middle band again on its way up. If this pattern repeats, Bitcoin might stabilize around $58,000 to $60,000—a level it is currently hovering around. If this scenario plays out, it could mark the last significant bottom for Bitcoin before the next major bull run, much like what happened after the 2020 halving.
Conclusion
In light of the current indicators, Bitcoin faces a challenging road ahead. With three out of four key metrics signaling bearish trends, the potential for further price declines seems strong. While the dormancy flow indicator remains within its typical range, history shows that it can dip below the lower band, suggesting that downside risks are still present. As a result, our outlook remains cautious, and we expect Bitcoin to stay below $60,000 until at least late September or October.
