Cryptocurrency Bill Fails, Fed Raises Rates, Yet Bitcoin Rises?

Author | Cathy, Blockchain Simplified

The bill failed, interest rates were raised, yet Bitcoin rose by 6%. This is the state of the cryptocurrency market over the past week.

On September 15, the "Clarity Act," which the crypto industry had lobbied for over a year, collapsed in the Senate with 49 votes in favor and 50 against, falling short of the 60 votes needed to advance. Coinbase and Circle dropped about 10% that day, with Bitcoin briefly falling below $75,000 from nearly $80,000.

The next day, the Federal Reserve unanimously voted to raise interest rates by 25 basis points, bringing the federal funds rate to between 3.75% and 4%, the first increase since July 2023.

On the third day, the SEC issued a five-year "innovation exemption" order, allowing tokenized U.S. stocks to be traded on public blockchains using liquidity pools. On September 18, Bitcoin surged from $76,000 to above $81,000, with CoinGlass reporting approximately $470 million in short positions liquidated within 24 hours.

In three days, two heavy blows and a piece of candy. The market chose the candy.

A week ago, Glassnode referred to the 1.07 million Bitcoins accumulated between $83,000 and $86,000 as the "visible ceiling for everyone." A week later, with both negative factors realized, the price returned to the foot of this wall.

The question has changed: Is this the starting point after all the bad news, or a repeat of 2023's pattern of rising first and then falling?

01. After Two Heavy Blows, Price Only Dropped to $75,000

The core of the CLARITY Act is to clarify which types of digital assets fall under the jurisdiction of the SEC and CFTC. The bill's sponsor, Republican Senator Cynthia Lummis, stated before the vote that she had agreed to over 120 demands from the Democrats, and if it still couldn't pass, "then we are done."

What held it back was not the crypto industry itself, but a moral clause. The Democrats insisted that the restrictions on public officials holding digital assets should extend to the President and the First Family, believing that the revised text did not achieve this, resulting in no votes in favor and four Republicans opposing.

As a result, federal legislative certainty is at least postponed until the next Congress.

On the interest rate hike side, Fed Chair Waller stated at a press conference, "Inflation is too high and has been too high for too long." Economic forecasts suggest inflation will not return to 2% until 2029, with 16 out of 18 officials on the dot plot expecting another hike this year. The two-year U.S. Treasury yield rose to 4.74%.

However, the price response was quite restrained. On the day of the announcement, Bitcoin fluctuated between $75,000 and $76,500, closing at $76,200, and the recent buying zone of $76,000 to $82,000 identified by Glassnode was not breached. What truly left the market was ETF money: on September 15 and 16, the U.S. spot Bitcoin ETF saw a net outflow of $746 million.

The bad news has landed, but the price did not collapse. This is the first signal given by the market.

02. What Exactly Did the SEC's Exemption Order Allow?

In the past two years, tokenized U.S. stocks were mostly issued overseas and sold only to non-Americans, essentially being price-linked synthetic products, with holders receiving no dividends and having no voting rights.

This order introduced a different approach. From September 17 until September 17, 2031, qualifying platforms can match the buying and selling of tokenized U.S. stocks on a public, permissionless blockchain using automated market maker liquidity pools without needing to register as exchanges; institutions providing funds to the pool also do not need to register as dealers.

There are many conditions. Tokens must have the same rights as real stocks, including dividends and voting rights, and synthetic products are not allowed; issuers must be notified in writing 30 days before launch, and issuers can veto; it is only open to Americans who pass identity verification; if the underlying stock is halted on the exchange, trading on the blockchain is also halted.

Another piece of the puzzle was laid down in June: the SEC proposed to repeal Rule 611 of the National Market System, which requires every stock trade to be executed at the best price across the entire market, while automated market makers cannot meet this requirement due to their formulaic pricing. Without repealing Rule 611, liquidity pools would be legally non-compliant.

SEC Chair Paul Atkins stated plainly in a statement: Congress failed to advance the Clarity Act, so today the SEC took a step forward.

Kenneth Bentsen, chair of the Securities Industry and Financial Markets Association, issued a statement that day expressing concern that multiple tokenized versions of the same stock trading in parallel could fragment liquidity and confuse investors.

The market voted with prices. Uniswap's UNI rose about 30% within 24 hours, hitting a 10-month high; Ondo, which tokenizes compliant government bonds, rose 7.39%. Currently, the total value of tokenized real-world assets on public chains is only over $30 billion, with BlackRock's BUIDL fund accounting for about $2.8 billion and only open to institutions.

The 25 basis point rate hike was digested by the market in one day. With U.S. stocks going on-chain, the market responded with a 6% increase.

03. How Did 2023 Experience a Rise Followed by a Fall?

Looking back at the K-line for 2023, the first half of the script is almost identical.

On June 15, 2023, BlackRock submitted its application for a spot Bitcoin ETF, starting Bitcoin at $25,000. On July 13, a judge ruled that XRP's secondary sales on exchanges do not constitute securities sales, causing Bitcoin to surge to $31,800, a 13-month high. Again, it was a rise driven by regulatory good news.

On July 26, the Fed raised rates by 25 basis points to 5.25% to 5.5%, with Bitcoin closing that day at $29,400, showing almost no reaction. In the following 13 days, the price slightly rose between $29,000 and $30,000, peaking at $30,200 on August 8, the highest point after the rate hike.

Then it began to decline. On August 17, Bitcoin dropped from $28,700 to $25,400, a drop of 11% during the day. CoinGlass reported that 175,000 people were liquidated within 24 hours, amounting to $1.032 billion; CoinShares reported that the open interest in perpetual contracts decreased by $2.75 billion in one day, the largest deleveraging since the collapse of FTX.

The narrative that day was that SpaceX had reduced and sold its Bitcoin holdings, and Evergrande had filed for bankruptcy protection in New York, but the larger backdrop was that the 10-year U.S. Treasury yield had risen to its highest level since 2007. On September 11, Bitcoin fell below $25,000 again.

After the rate hike, there was a 13-day rise, followed by a five-week decline of 17%. If calculated from the high of $31,800 on July 13, it dropped 22% over two months. The excitement brought by regulatory good news was gradually worn down by interest rates.

The similarities are clear: regulatory good news gives a push, while macro factors push back.

The differences are also clear. In 2023, there was no spot ETF, and the buying was mainly from retail investors in exchanges and Grayscale's trust. Today, the total assets of U.S. spot ETFs are about $103 billion, with a net inflow of $3.52 billion in August alone. The total market cap of stablecoins stands above $300 billion.

However, Glassnode's judgment from last week cannot be ignored: new demand has already quieted. After 27 consecutive days of inflows on-chain, it stopped; the number of Bitcoins bought by listed companies dropped from 89,000 in July last year to only 5,900 in the last three months; the supply of stablecoins is down 4% from the peak in April.

Both interpretations have their basis. The structure of buying has indeed changed, but the buying itself is decreasing.

04. Still 6% Away from $86,000

$81,000 is just back to the lower edge of the wall. According to Glassnode's early September statistics, about 1.07 million long-term holders' chips are accumulated between $83,000 and $86,000, and the overall breakeven point for ETFs is also near $86,000, which has been in floating losses for 228 consecutive trading days by early September.

Whether it can truly break through the wall depends on three indicators.

First, Bitcoin's weekly closing price must stabilize above $86,000, indicating that the 1.07 million chips have been digested.

Second, the U.S. spot ETF must see a net inflow of over $1.5 billion for three consecutive weeks, indicating that new money is continuous, not just a one-day pulse.

Third, the 30-year U.S. Treasury yield must return below 5%, indicating that the risk-free rate is no longer pressing on risk assets.

Currently, none of the three indicators have been met; they have simply not worsened. The price on September 19 was around $81,000, still 6% away from $86,000. The ETF saw a net outflow of $746 million in the first two days of the week, followed by an inflow of $593 million in the next two days, essentially breaking even for the week, with no continuous inflow. The 30-year U.S. Treasury yield closed at 5.33% on September 18, still above 5%.

The options market is more straightforward. The biggest pain point is at $72,000, with call option sell orders piled up at $85,000 and $90,000. Those selling options are betting that the price will not break out of the range between $72,000 and $85,000.

Arthur Hayes, co-founder of BitMEX, posted the day after the rate hike, stating that raising rates while government debt is so high is actually a stimulus: the interest on bank reserves and the interest for Treasury holders rise together, ultimately leading to more consumption, especially of financial assets. The total assets of the Fed and banks are still growing, and the amount of money is increasing, but the price of money is also rising.

His conclusion is that "the prices of financial assets will continue to rise."

On the contrary, Peter Boockvar, chief investment officer of One Point BFG, believes that this rate hike merely reversed the rate cut from last December; the Fed is mainly responding to an energy supply shock, which it has no control over, and it would be better to let the bond market determine the price of money itself.

Hayes speaks of the quantity of money, while Boockvar speaks of the price of money. In 2023, the winner was the price.

Will this time be different? The answer lies not in the SEC's order, but in the flow charts of ETFs in the next two weeks.

The candy has already been consumed, but the wall still stands there.

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