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Good morning everyone,

About a week ago, bitcoin fell into correction territory when it hit the USD58,000 level. It quickly bounced back to the USD64,000 level, but has since pulled back again and has been chopping around in the USD60-USD63,000 range.

I want to take a moment to share my thoughts on where we are in the interest rate cycle and in the bitcoin cycle and how things may play out over the next few months.

Let's get started.

DISCLAIMER: This newsletter is not financial advice. It does not take into account your financial situation, is general in nature, and is for educational purposes only.

Also, this newsletter contains affiliate links. This means that I may receive a commission from them. But for Crypto Down Under, I only choose products I use myself and can recommend wholeheartedly. Don’t forget to do your own research.

1. Expectation vs. reality

The most important thing you need to know about market sentiment right now is that in the US, market participants priced in six Fed rate cuts at the beginning of the year.

That optimism has gone up in smoke.

Inflation has proven to be more persistent than policymakers had anticipated. Cutting rates and lowering the cost of capital too soon would only lead to more inflation.

According to the CME Fed Watch tool, market participants are currently pricing in only a 49% chance that the Fed will cut rates by 25 basis points (0.25%) in September.

Market participants also think there's a 36% chance that the Fed will cut rates by another 25 basis points in December. (But they also think there's a 33% chance that rates will remain on hold in December.)

Keep in mind that these odds only reflect current market sentiment and may change over time.

Long story short, we will only see 0 to 2 rate cuts in the US this year.

At its last meeting, the Fed ruled out a rate hike in June but didn't provide clarity on a timeline for rate cuts.

This uncertainty is weighing on the market. It is pricing in a new reality of only 0 to 2 rate cuts this year.

Things aren't much different in Australia. At its last meeting, the Reserve Bank of Australia (RBA) decided to keep interest rates on hold. But next Tuesday the Treasurer will deliver the 2024-25 budget.

If the RBA perceives the budget as inflationary, it may even consider another rate hike. Keep in mind that the cash rate in Australia is 4.35%, which is much lower than in the US, where the current Fed rate is 5.25% to 5.50%.

So the RBA may feel it has some room to maneuver, even though higher interest rates will immediately translate into higher mortgage repayments for millions of Australians, as the vast majority of mortgages in Australia are variable. (In contrast to the US, where the vast majority of mortgages are fixed.)

2. Putting things in perspective

It's easy to lose perspective when things don't go as planned.

But if you zoom out a bit, bitcoin is doing very well.

It's down more than 11% on the month and more than 15% from its all-time high in March.

But year over year, bitcoin is up more than 120%. And even year-to-date, bitcoin is up nearly 40%.

In addition, keep in mind that no bitcoin bull run comes without corrections.

According to crypto analyst Rekt Capital, there are 5 phases of the bitcoin halving. We are currently in phase 4, the post-halving resistance. This phase will eventually be followed by phase 5, the post-halving parabola.

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3. After winter must come spring

You can look at a lot of technical metrics to figure out where the price of bitcoin is going in the short term. You will find metrics that tell you that bitcoin is going down, and you will find metrics that tell you that bitcoin is going up.

But if you zoom out a little bit, we are at the end of a tightening cycle. Interest rates have probably peaked, and if they haven't, they're only going to go up a little bit more.

If somebody tells you that interest rates in Australia are going to go to 17% as they did in the early '90s, they don't understand how indebted countries are today. No country can afford to pay 17% interest on its debt. At the current interest rate level, the US already spends more on interest payments than on defense.

A key date to watch is the Fed meeting in September.

If market participants believe that the Fed will cut rates in September (the last Fed meeting before the US elections in November), market sentiment is likely to shift a few months before that.

And when market sentiment changes, bitcoin will be one of the biggest winners.

The two reasons are:

1. With the launch of ETFs in the US and Hong Kong (and later this year in Australia), it's easier than ever to buy bitcoin.

2. Once demand kicks in, it will meet less supply, as only 450 bitcoin are being produced per day since the last halving in April. (Compared to 900 bitcoin per day before the halving.)

Remember, none of this is financial advice. But I'm staying the course and expect us to end the year much higher than we are now.

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