Bitcoin (BTC) suffered when overnight investors transferred a record amount of cash to a Federal Reserve facility after the central bank began paying interest on the funds.

The US Federal Reserve received $ 756 billion in reverse repo programs from around 70 market participants on Thursday. The stock is about $ 172 billion more than last week’s deposits and about $ 235 billion more than on Wednesday, with only 53 investors taking the opportunity.

In a reverse repo transaction, cash comes primarily from money market funds and state-sponsored banks. As of Wednesday, the service offered qualified users a zero interest rate.

But after the Federal Reserve announced a faster and faster rate hike – in 2023, instead of the previously expected 2024, the mechanism changed the repo rate to 0.05% and the interest rate on the excess reserve rates banks deposit 0.15% from 0, 10%.

Fed rate is adjusted to excess demand. Source: FT, Federal Reserve, Bloomberg.
Invest extra money in interest
First of all, due to the quantitative easing of the US economy, excess dollar liquidity goes to money market funds, which then invest it in short-term government securities. High demand for these securities often sent returns to negative territory.

The total amount of financial assets held in money market funds before and after (shaded) recessions. Source: Fred
Negatively executed securities in response to quantitative easing from the Federal Reserve have proven to be one of the best bullish catalysts for bitcoin and other digital assets since March 2020. Unlike traditional debt, the crypto sector has promised better returns and in some cases stable returns from it. emerging decentralized financial industry.

But when the Fed kicks up markets with its hawkish tone, casual investors turn to objects that look less risky than bitcoin or gold and promise decent returns. As a result, the largest cash flow in the Fed repo market is recorded.

“We seem to see an increased relative correlation between the bitcoin price and the Fed’s reverse repo market,” said Peter Kozyakoff, co-founder and CEO of the cryptocurrency exchange service Mercuryo. he added:

“Many investors choose the more volatile bitcoin because it promises higher returns. However, given current market trends, some BTC investors may be clearing their positions because the outlook for the dollar is crucial at the moment.
The US dollar, which is also a haven for market volatility, rose to 92.70 on Friday against a basket of major foreign currencies. This was the highest dollar level since mid-April. Bitcoin reacted negatively to stronger gains.

Bitcoin and the US dollar’s reaction to the Fed rate signal (for now). Source:
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Raul Pal, founder / CEO of Global Macro Investor, said that the rise in the dollar led to a sharp fall in inflation. However, the macroeconomic analyst stressed that the Fed-led narrowing problems will not harm alternative hedges such as Bitcoin and gold in the long run.

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He noted that the US government tends to push for more stimulus packages that expand the Federal Reserve’s balance sheets. This means that the central bank continues to buy government debt, which reduces bond yields. Pal sa:

“I still believe that the afternoon is weaker than expected, and the fear of inflation is diminishing at the moment, the growth looks uneven. This leads to increased incentives (instead of tightening) in the fourth quarter.

Yields on 10-year US government bonds have fallen after each recession since 1980. Source: Bloomberg, Global Macro Investor
The analyst added that the trend of dollar recovery will stabilize in the second half of 2021. Finally, capital will begin to return to the gold and cryptocurrency markets.