A surprise jump in the US employment rate to 4.3% from 4.1% in July has triggered a sharp drop in risk assets on Friday, with the Bitcoin (BTC) price plunging briefly back below $63,000 as US recession fears rise.
The Bitcoin price briefly as low as the $62,300s before rising back to the $63,000s as US equity markets reeled.
The headline US jobs number showed 114,000 jobs were added to the US economy last month, below the expected 176,000.
BREAKING: US economy adds 114,000 jobs in July, BELOW expectations of 176,000.
The unemployment rate rose to 4.3%, ABOVE expectations of 4.1%.
This marks the highest US unemployment rate since November 2021.
The labor market is beginning to crack.
— The Kobeissi Letter (@KobeissiLetter) August 2, 2024
But all eyes were on the jump in the unemployment rate, given that it triggered recession warnings.
More specifically, as noted by economist Holger Zschaepitz, the Sahm Rule Recession indicator jumped to 0.53 from 0.43, indicating a strong likelihood of an incoming recession.
Sahm Rule Recession Indicator jumped to 0.53 from 0.43 following weak US jobs data, triggering a recession warning. The Sahm rule is a formula used to identify the start of a recession based on the unemployment rate. It triggers a recession warning when the 3mth moving avg of… pic.twitter.com/9b3CHEoIrR
— Holger Zschaepitz (@Schuldensuehner) August 2, 2024
Recession bets sent US government bond yields sharply lower as traders upped bets on a more aggressive Fed rate cutting cycle.
Money markets now imply a more than 70% chance that the Fed cuts interest rates by more 50bps in September, per the CME’s Fed Watch Tool.
Why Are Fed Rate Cut Bets Not Positive for the Bitcoin Price?
Rising Fed rate cut bets are normally touted as a positive catalyst for the Bitcoin price.
But this hasn’t been the case on Friday. That’s because the context behind the Fed’s motivation for cutting rates is important.
If the Fed is cutting interest rates to maintain a balanced economy that’s not headed for imminent recession, then that’s arguably positive for risk assets like BTC.
However, if the Fed is forced to rush into rate cuts because financial conditions have been overly tight and a recession is looming – as is potentially the situation we face – that’s not a good thing.
That’s a Fed mistake that has ended up damaging the economy.
Just as the Fed letting the economy run too hot in 2021 then being forced to sharply raise interest rate in 2022 hurt Bitcoin, the Fed holding interest rates too high for too long in 2024 and being forced to rush into rate cuts might also hurt BTC.
Where Next for Bitcoin?
Up until now, the idea that the Fed was going to engineer a so-called “soft landing” was a dominant assumption in the market.
A “soft landing” refers to a situation where the Fed brings inflation back under control whilst avoiding a recession.
The “soft landing” assumption had enabled rising Fed rate cut bets to act as a tailwind to risk assets until now.
But now that narrative is challenged by the latest data, the outlook is complicated.
That raises downside risks for Bitcoin. Of course, BTC faces other headwinds right now too.
US VP Kamala Harris’ betting market implied probability of winning November’s presidential election has been rising.
Kamala Harris' election odds just hit a new all-time high. pic.twitter.com/its4N1BHzf
— Polymarket (@Polymarket) August 1, 2024
Crypto markets are seemingly taking that as a negative, given ex-President Trump is now seen as the pro-crypto candidate.
The supply overhang of the US government and Mt Gox creditors is also a concern.
If support in the form of the 50 and 200DMAs (at $63,100 and $61,300) is broken, a move back below $60,000 could be on the cards.
And a retest of recent lows in the $53,000 area is a possibility.
Lower Interest Rate, Politics to Power BTC Price Rebound?
But betting that a US recession will be Bitcoin’s demise would be an unwise move.
While recession fears might initially weigh on the Bitcoin price, lower interest rates will eventually power an even stronger comeback.
Take 2020 for example. Central banks around the world axed interest rates to zero to support their Covid-19 lockdown-hit economies.
While Bitcoin initially suffered, it experienced a whopping comeback in late 2020 into 2021.
If Fed interest rates are about to sharply drop, a dump of new liquidity should power an eventual strong rebound in its price.
Other catalysts may also help. The era of anti-crypto policy in the US looks to be coming to an end.
Either ardently pro-Bitcoin Trump retakes the White House or Democrat and current VP Kamala Harris does.
And that wouldn’t necessarily be a bad thing – a growing swell of Democrats are fighting to push their party into a more pro-crypto direction. And they have a lot of momentum.
All that is to say that the US has probably passed its point of peak anti-crypto policy.
And that means politics is likely to be a long-term tailwind, though in the short-term, crypto markets will continue to prefer a Trump victory.
Don’t Forget the Halving
It’s also worth noting that Bitcoin tends to experience parabolic rallies to fresh record highs starting 6 months after the reward halving. And that six-month mark is coming up in October.
$BTC post-halving rally hasn't even started yet
Those who are selling #Bitcoin now will regret!
pic.twitter.com/DGg976qs4R
— Elja (@Eljaboom) August 2, 2024
“Those selling Bitcoin now will regret” one analyst quipped on X.
And this next crypto bull market may have more fuel than prior rallies thanks to US spot Bitcoin ETFs, which make it substantially easier for institutional investors to buy.
Remember also that Bitcoin has also shown signs in recent years of acting as a safe-haven, which means investor psychology might flip if recession looms, and they might start to pile into BTC as they might go into gold.
The overall conclusion then is that dips remain a good buying opportunity for long-term investors. Bitcoin remains one of, if not the, best crypto to buy now.
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