Market Volatility Set To Continue

As we step into September, the crypto market is experiencing anticipated volatility, with Bitcoin trading 3.5% lower than last week at $56,682. Ethereum has slipped by 2.4%, and Solana is down 11%. This turbulence is in line with the historical pattern of September being a tough month for crypto.

This decline was amplified by news today of the Japanese central bank hinting at higher rate increases, sparking further fear across markets as the potential unwinding of the yen carry trade resurfaced. As a result $1.05T was wiped from US stock markets. Additionally, looming rate cuts in the US have created uncertainty around how financial markets will react.

Beneath the surface of this short term volatility, there’s potential for significant opportunities. While the market may face further corrections in the near future, upcoming rate cuts and greater political clarity could set the stage for a strong end of year recovery. These challenging times are likely to be pivotal moments for portfolio growth potential, making it crucial to stay engaged

Bitcoin Weekly Price Chart

Upcoming Rate Cut Effects

A Federal Reserve rate cut in September is almost certain, but its impact on stocks and crypto is uncertain. Generally, lower interest rates should boost both stock and crypto prices by making borrowing cheaper, which encourages more spending and capital investment by companies.

However, history tells us that stocks don’t always rise immediately after a rate cut. The market’s reaction often depends on broader economic context and the effects that follow post the cut, hence a short term drawdown occurs as market participant's wait for this to play out. For example, if economic indicators improve after a rate cut, the Fed can further cut rates, or agree on a stable rate, which is what positively influences the market and leads to the strong resurgences we've seen in the past.

First Rate Cut Effect on S&P 500

The chart shows us how the S&P 500 has reacted to rate cuts in the past. The S&P 500 often sees an initial drop after a rate cut but typically rebounds within a few months, with an average increase of 2.5% after three months and 5.23% after 6 months. An extra layer of uncertainty added towards these upcoming rate cuts is traditionally September is the weakest performing month for stocks, with a average monthly return of -1.17%.

In the crypto market, lower interest rates typically boost liquidity and encourage investment into the riskier asset class, as investors chase higher returns. While short term volatility is expected, consistent with historical patterns, this turbulence often paves the way for long term growth.

Since crypto is still in its infant stage as a asset class, historical data is limited. However, notable trends have already been seen. In April 2019, when rates were at 2.44%, Bitcoin was priced at $5k. Between 2020 and 2022, as rates dropped below 0.10% in response to COVID-19, Bitcoin surged to an all time high of $69k. When rates rose again, peaking at 5.3% in July 2023, Bitcoin corrected to $15k before stabilising around $30k. Although these factors won't always align perfectly, the relationship between lower rates and higher Bitcoin prices is compelling.

Bitcoin on Exchanges Hits Record Lows

Bitcoin reserves on crypto exchanges have hit a new low, meaning fewer people are keeping their Bitcoin on platforms where they can easily sell or trade it. Instead, more Bitcoin is moving to cold wallets, which are secure storage options for long term holding. This shift suggests that investors are less interested in selling right now, likely because they believe prices will rise.

Available Bitcoin on exchanges has dropped by 13% since January 1st, reducing the available supply for purchase. This shrinking supply can act as an upcoming catalyst for a supply shortage as the market resurges later in the year. With fewer coins available, and demand increasing, it has the potential to cause a surge in Bitcoins value.

Ethereum Revenue Down 99%

Ethereum network revenue has dropped by 99% since March 2024, even though more people are using the network and as daily transactions on layer 2 solutions have doubled since February. Layer 2's are networks that are built on top of Ethereum that allows for faster and cheaper transactions, such as Arbitrum.

On March 5, network fees were at their highest, reaching $35 million. However, after the Dencun upgrade on March 13, which lowered transaction costs for layer 2 users, fees have fallen dramatically, hitting just $556,000 on August 31. While this drop in fees is ideal for highly active traders using Ethereum, it has created inflationary pressure on the Eth token itself.

Lower fees mean that less Ethereum is being burned, which happens when users pay transaction fees. As a result, Ethereum is currently an inflationary token as the natural increase of its supply is outpacing the amount burned in fees. This has likely been leading towards Ethereum's poor performance.

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