Crypto Markets Drop Ahead of Fed Decision

Cryptocurrency markets traded lower on Wednesday amid expectations of a rate cut by the Federal Reserve.

Bitcoin (BTC) and Ethereum (ETH) slipped 3% and 2%, respectively, with BTC trading at $59,700 and ETH at $2,300. Polkadot (DOT) plunged 5%, while Solana (SOL) dipped 3%. The total crypto market capitalization decreased by 3.2% to $2.15 trillion in the last 24 hours.

The Federal Reserve's two-day meeting began yesterday, with a rate cut decision expected at 2 pm ET today.

"This is going to be the most uncertain Fed decision in over a decade," The Kobeissi Letter wrote. Traders are divided on the extent of the cut, with CME Group’s FedWatch tool indicating a 65% chance of a 0.5% cut and a 35% chance of a 0.25% reduction. Polymarket traders are similarly divided, with 52% expecting a 50 basis point cut and 47% betting on a 25 basis point cut, with $51 million staked on the outcome.

Rate cuts are typically favorable for risk assets like cryptocurrencies. Lower rates mean cheaper borrowing, encouraging investment and spending. This increases market liquidity and can drive investors toward higher-yielding assets like crypto, which often offer better returns in a low-interest-rate environment. Additionally, reduced rates can weaken the dollar, potentially boosting crypto prices as an alternative store of value.

“The Federal Reserve is widely expected to cut interest rates by 25 basis points (bps) in response to moderating inflation and slowing job growth,” 21Shares wrote.

Economists surveyed by Bloomberg also expect a 25 basis point reduction, with 104 out of 114 economists predicting this outcome.

"The start of a rate-cutting cycle aimed at normalizing interest rates supports hard assets as stores of value,” QCP Capital analysts wrote in a market commentary. “While drawdowns and high volatility are expected, don’t let that detract you from the path to higher BTC prices."

Arthur Hayes' Take on the Fed's Rate Cut

At Token2049 in Singapore on Sept. 18, BitMEX co-founder Arthur Hayes criticized the Federal Reserve for considering rate cuts amidst rising U.S. dollar issuance and government spending.

"I think the Fed is making a colossal mistake cutting rates at a time when the US government is printing and spending as much money as they ever have in peacetime," Hayes stated. He warned that crypto markets might initially rally but could "collapse a few days after the Fed’s rates" are cut.

Data from Coinglass reveals that short traders faced liquidations totaling $77 million over the past 24 hours, while long traders suffered $73 million in liquidations. Bitcoin liquidations alone reached $49 million, primarily consisting of short positions.