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After Powell’s speech, Bitcoin prices briefly rose to $64,000. However, this rise did not last long and Bitcoin lost 10% of its value, falling to $ 57,400 on September 2.

As of September 3, Bitcoin price had recovered slightly and was trading at $59,238. Hayes attributed the reason for this price decline to reverse repurchase agreements (RRPs). Reverse repurchase agreements are transactions with the commitment to buy back securities at a higher price at a certain future date, currently offering an interest rate of 5.3%.

This rate of return is higher than the 4.38% interest rate offered by lower-yielding treasury bills. According to Hayes, this is causing major money market funds to withdraw their cash from Treasury bills and direct them to reverse repo transactions.

This leads to a decrease in the amount of money circulating in the market for risky assets, and cryptocurrencies are among these risky assets. Hayes states that this development provides less liquidity for risky assets such as Bitcoin, and therefore the value of these assets may decrease.

The account, known as “ELI5 of TLDR” on the X platform, explained that the reverse repo program offers an opportunity for major banks and money managers to “park” their cash for short periods of time.

While this mechanism provides a safe investment tool for short-term cash needs, it also prevents capital from circulating within the economy as it provides more interest income than other safe investments. Instead of flowing within the market, capital prefers to stay in this “parking area”, which it sees as safer.

According to Hayes, another $120 billion was added to reverse repo transactions after the Fed announced a possible interest rate cut in September. This contradicts the traditional assumption that low interest rates are positive for high-risk assets.

Normally, low interest rates encourage borrowing and spending, providing more liquidity in the market. A weaker dollar could make alternative assets like Bitcoin stronger, while safe and interest-bearing accounts become less attractive. However, in the current situation, capital continues to remain in reverse repo transactions, which leads to the failure to realize the expected increase in liquidity in the market for risky assets such as Bitcoin.

The CME Fed Watch tool predicts a 69% probability of a 25 basis point rate cut and a 31% probability of a 50 basis point rate cut at the September 18 Fed meeting. Although this interest rate cut expectation has created a great movement in the markets, according to Hayes, the tendency of capital to reverse repo agreements that offer high returns has a negative impact on risky assets.

If the Fed makes a larger interest rate cut, this could signal that the central bank is taking a more aggressive stance. This could lead to a more dramatic reaction in markets, resulting in a greater revival in economic activity.

However, as Hayes noted, capital choosing to remain in reverse repo transactions under current conditions could lead to a limited positive impact on assets like Bitcoin.