The stagnation of Bitcoin’s price despite the US Federal Reserve’s first interest rate cut since 2020 has perplexed many investors and traders in the market. In a modern post on X, Andrew Kang, CEO of Mechanism Capital, addressed the disproportionate emphasis that market participants are placing on Federal Reserve interest rate cuts and economic stimulus in China.

Why is Bitcoin stagnating?

Kanga challenges the prevailing market belief that Federal Reserve interest rate cuts will significantly escalate the prices of Bitcoin and cryptocurrencies. “Fed rates are just one factor influencing global liquidity, and global liquidity itself is just one factor influencing cryptocurrency prices,” he said. Kang believes it is “nonsensical to see BTC escalate 4.5x at a time when rates are at multi-decade highs – showing little correlation between rates and BTC – and then expect a powerful inverse correlation to emerge as soon as rates start fall down.”

He acknowledges that some argue that future interest rate changes are already priced into the market, but responds that this logic should be applied equally to interest rate increases and decreases. “This does not mean that interest rates are not important, but rather that most market participants overweight them significantly,” Kang added. He notes that stocks are more closely linked to interest rates due to factors such as the discount rates used to value cash flows and the mature corporate debt markets used to finance growth.

Referring to the recent economic stimulus in China, Kang notes that its impact on Bitcoin and cryptocurrencies is even less significant than many believe. “It is not surprising that people extrapolating the Chinese stimulus as extremely optimistic for cryptocurrencies are primarily people from outside China,” he commented. According to Kang, investors in China have noticed a shift from investing in cryptocurrencies to series A shares on the stock exchange.

Backing up his claim with data, Kang noted: “Since the announcement of the Chinese stimulus program, USDT has fallen to CNY. Currently it is still 3%. This suggests reduced demand for leading stablecoin Tether (USDT) in China, which is consistent with a move towards time-honored stocks.

Despite his criticism, Kang clarifies that he is not bearish on Bitcoin. “I just think some people have forgotten about skiing a little bit,” he noted. Kang predicts that Bitcoin will trade in the $50,000 to $72,000 range until a significant modern catalyst emerges.

However, he remains confident about the opportunities in the market, stating: “The constant turnover of capital and the development of new projects means that it will still be possible to buy coins that will generate profits like the bull.” Nevertheless, Kang cautions against the potential volatility resulting from leveraged positions: “The market will continue to be susceptible to smaller corrections if leverage becomes too high (currently decently high).”

Engaging with the community, user X Jakubko (@erkousti) suggested that Bitcoin’s price escalate in 2023 is more related to the wait for the ETF launch than to interest rates. Kang agreed and replied, “That’s exactly what I mean. Interest rates are just a small piece of the puzzle. Even though these were negative for BTC, other factors such as ETFs were able to push BTC’s price higher. Other factors may cause it to be higher or lower in this case. “We don’t guarantee infinite prices just because of interest rate cuts.”

Echoing this sentiment, cryptocurrency analyst Astronomer (@astronomer_zero) commented: “I believe that interest rates (and yield inversion) only have a negligible impact on price. Rather, they are holistic indicators that are important to bond market participants. But the zero impact on stocks or cryptocurrencies has already been proven.”

Fellow analyst, Res (@resdegen), highlighted correlation between Bitcoin and money supply: “BTC is more correlated with the amount of money than interest rates. It started to rise as the RRP fell, resulting in net positive liquidity, regardless of interest rates, which were indeed near all-time highs.”

At the time of publication, the BTC price was $60,903.

Featured image created with DALL.E, chart from TradingView.com