Bitcoin, the leading cryptocurrency, may experience a temporary setback even as the market anticipates potential interest rate cuts by the Federal Reserve, according to analysts. This contradicts the common belief that rate cuts are generally favorable for risk assets. A report by Bitfinex reveals that Bitcoin has witnessed a significant surge of up to 32% since August 5, with open interest for BTC/stablecoin pairs rising by nearly 30%. However, the pace of this price increase has slowed down, currently standing at around 17% from the recent low of $58,153.

The report from Bitfinex indicates the possibility of a "sell the news" event in the cryptocurrency market as rate cuts become more certain. It points out that there has been notable selling activity in spot markets, particularly at the beginning of U.S. trading sessions throughout the past week. Further analysis reveals that the Cumulative Volume Delta (CVD) for spot Bitcoin trading pairs on major exchanges has dropped by approximately 66% since its peak on August 26. Conversely, the CVD for Bitcoin perpetuals has only declined by 11%, indicating a significant difference between spot and derivatives markets. A declining CVD typically indicates stronger selling pressure.

Bitfinex analysts explained that while rate cuts are not necessarily negative for the market in the long term, short-term declines have been observed following the previous four Federal Reserve rate cuts, with an average drop of about 6% within a few weeks after the cut. They suggested that while the S&P 500 might experience a modest correction, Bitcoin could face a more substantial decline due to its recent underperformance compared to traditional markets. Analysts highlighted that short-term buyers and investors who anticipate a post-rate cut market rally often look for an exit upon the positive news, contributing to the "sell the news" phenomenon. Additionally, macro traders tend to view the confirmation of rate cuts as a signal to sell their positions.

Bitfinex analysts also noted that it typically takes a few months for liquidity to enter the market following rate cuts, as intended by the Federal Reserve. However, they expect lesser volatility and a shorter "sell the news" event this time, as the forthcoming rate cuts have been widely communicated and are more predictable than in previous cycles.

The report also highlights the historical performance of Bitcoin in September, pointing out that it has traditionally been a volatile month for the cryptocurrency. Since 2013, September has seen an average return of -4.78% for Bitcoin, with a typical peak-to-trough decline of 24.6% since 2014. Aligning with the analysts' projections, the report suggests a potential drop of 15-20% in Bitcoin prices following a rate cut, placing a potential bottom between the low $50,000s to mid-$40,000 range.

While some market observers share this bearish sentiment, others believe that rate cuts, although initially causing short-term declines, tend to have positive long-term effects. Matteo Greco, a Market Analyst at Fineqia, explained that as markets adjust and expectations are priced in, the benefits of lower interest rates start to emerge. The anticipation of a 75-100 basis point rate cut by the end of 2024 is already factored in by many, so any deviation from this expectation could negatively impact markets.

With market sentiment currently indicating a 70% probability of a 25 basis point rate cut and a 30% chance of a 50 basis point cut at the September meeting, combined with signs of a weakening labor market, including disappointing non-farm payroll reports and declining job openings, the case for imminent rate cuts strengthens, as highlighted in the Bitfinex report.

As the cryptocurrency market braces itself for potential Fed rate cuts, the cautious stance from analysts suggests that Bitcoin may face short-term challenges despite the common belief that rate reductions are typically positive for risk assets. Investors will closely monitor how Bitcoin performs in the coming weeks, taking into account market dynamics and the impact of the anticipated rate cuts.