Rate Cut Celebrations are Likely, But Watch for Retail Traders Ruining the Party

🥳 The first interest rate cut in 4 years instantly and predictably saw a bullish reaction for both crypto and the S&P 500.

However, the price reactions quickly reversed course and made some surprise detours, as is usually the case when the crowd uniformly believes a news story is universally good or bad for markets.

This was the first rate cut we have seen since the emergency Fed meeting that resulted from the March 15, 2020 emergency reaction to the pandemic. The circumstances were obviously very different, even though the Fed still refers to this latest cut as a crisis 2 interest rate cut (to combat inflation and concerning economic conditions). For those who scooped up more crypto when BTC fell as low as $3.6K during this time, it ended up being an optimal time to buy, regardless of how much of crypto's recovery should be credited toward the Fed's emergency cuts back then.

We have seen this familiar price pattern after both the Ethereum merge and more recent Bitcoin halving. The crowd gets euphoric after an expected news event occurs, assume that prices are officially going straight 'to the moon', and are then surprised when prices retrace in the midst of their flurry of buy orders they're executing.

And since this Fed rate cut result was considered an 85% likely outcome leading up to the news, we can expect that prices were already mildly 'baked in' with traders anticipating confirmation today. This is often referred to as a 'buy the rumor, sell the news' effect. However, it may not be as much of a 'fakeout' or 'bull trap' as the contrarians may think, either.

At the end of the day, it is undeniable that rate cuts have historically benefited traditional equity markets. And cryptocurrency has been closely intertwined with the performance of stocks, particularly since 2022. Many have even half jokingly referred to Bitcoin as nothing more than a high leveraged tech stock, due to its similar performances to those in the space.

But diving into some metrics, it is undeniable that social volume toward these confirmed rate cuts has exploded with this news, and the crowd reaction is likely going to continue to be quite bullish for the short-term (barring a major crypto retrace).

On top of this, two more rate cuts are expected by the end of 2024, which would bring interest rate levels down 100bps heading into 2025.

You can use positive vs. negative sentiment as a guide in these coming days to see which way the crowd appears to be leaning. When positive sentiment is beginning to take a lead over negative sentiment, it's a sign the crowd is leaning a bit greedy. And if negative sentiment is taking the lead, this may be a strong time to buy into others' fear.

Also, watch funding rates closely. Regardless of what people are saying on social media, a lot ultimately will fall on whether traders are opening major longs or shorts as a reaction to the news. Odds are that it will be a lot more longs, but we will see whether price momentum gives them the confidence to do so.

If metrics stay fairly neutral, market caps should theoretically see some growth in the initial days after the dust settles and reactions cool following this news. It will be up to crowd FOMO and greed from retail traders to dictate just how far any rally toward the March all-time high can go. 🤑

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Disclaimer: The opinions expressed in the post are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.