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Federal Reserve’s 50 BPS Rate Cut Sparks $126M Crypto Short Squeeze

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Giuseppe Ciccomascolo
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Key Takeaways

  • The Fed surprised markets with a larger-than-expected rate cut of 0.50%.
  • The unexpected rate cut triggered a massive short squeeze, resulting in over $126 million in liquidations.
  • The overall cryptocurrency market cap and total market volume increased, reflecting a positive sentiment.

In a seismic shift in monetary policy, the Federal Reserve cut interest rates by a half-percentage point on Wednesday, Sept. 18, a move that sparked widespread euphoria among investors.

But in a jarring countertrend, crypto short sellers—especially those betting against cryptocurrency futures—were bludgeoned, reeling from the Fed’s sudden change in direction.

Fed Cuts Rate By 0.50%

The Federal Reserve’s interest rate cut caught markets off guard.

The unexpected 50-basis-point reduction brings the interest rate down to a range of 4.75% to 5.00%. The decision reflects the Fed’s growing confidence that inflation is finally under control.

After months of caution, Chair Jerome Powell expressed renewed confidence in the prospect of further rate cuts this year as data suggests an inflation rate inching closer to the Fed’s 2% target.

Several economic indicators supported the Fed’s decision. This includes the once-red-hot labor market showing signs of cooling and the jobless rate remaining reassuringly low. Additionally, inflation numbers, which had been a major concern, have been trending downward.

Powell’s shift in tone comes after months of expressing hesitancy about rate cuts. However, recent data and his comments at the Jackson Hole symposium suggest that he is now more willing to take decisive action.

The Fed’s decision is a clear signal that it is committed to supporting economic growth, even as it continues to battle inflation.

Short Squeeze

The Federal Reserve’s surprise decision has sent shockwaves through the financial markets, triggering a massive short squeeze that wiped out over $126 million in crypto-tracked positions in the past 24 hours, compared to $73.2 million for longs.

According to data from Coinglass , 66,044 traders were liquidated, with the largest single liquidation order, for $8.9 million, happening on Bybit.

Crypto liquidation heatmap
Crypto liquidation heatmap. l Credit: Coinglass

The majority of movements occurred in the past 12 hours, with a staggering $142.35 million during this period. Shorts accounted for the bulk of the liquidations, totaling $114.1 million, while long bets amounted to $28.2 million.

Crypto Market Reaction

While futures positions were hit hard, the crypto market’s reaction to the interest rate cut wasn’t as dramatic.

Bitcoin’s price  remained relatively flat in the immediate aftermath of the announcement. However, as the news sank in, Bitcoin’s price began to tick upward, increasing by around 3% to $61,970, with its market capitalization swelling to $1.22 trillion, also a 3% gain.

Bitcoin's price
Bitcoin’s price increased by around 3% after the Fed’s announcement. l Credit: CoinMarketCap

Other large cryptocurrencies by market capitalization also experienced notable gains. Ethereum (ETH) rose by approximately 4% to $2,410.06.

Chris Aruliah, Head of Institution at Bybit, told CCN:

“While a 0.5% reduction in the Fed’s policy rate may provide a short-term boost to the cryptocurrency market, it is crucial to remain vigilant regarding the potential challenges posed by economic uncertainty and market fluctuations.”

At the time of writing, the global crypto market cap stood at $2.14 trillion, reflecting a 3.13% increase in the past day. Over the last 24 hours, total market volume reached $92.28 billion, marking a 19.08% rise.

Decentralized Finance (DeFi) platforms contributed $4.49 billion, making up 4.87% of the total 24-hour crypto market volume. Meanwhile, stablecoins dominated with $84.24 billion, representing 91.29% of the total volume.

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