Bitcoin's recent slump has triggered warnings of potential "trouble ahead" for global markets, as investors closely monitor the digital token's pronounced swings for clues about broader changes in risk appetite. The cryptocurrency has shed around 4% in the past two days, following a near 16% plunge in April, marking its worst monthly drop since the collapse of Sam Bankman-Fried's FTX digital-asset empire in November 2022.
As of 7:24 a.m. Thursday in London, Bitcoin was trading at approximately $57,462, hovering near a two-month low. Some investors view Bitcoin's fluctuations as a possible precursor to shifts in liquidity dynamics that can impact other assets. The token's recent slide coincided with the Federal Reserve signaling that interest rates will remain higher for longer, a stance that has tightened financial conditions by boosting Treasury yields and the dollar.
"Bitcoin is our favorite canary," said Charlie Morris, Chief Investment Officer at ByteTree Asset Management, in a note. "It is warning of trouble ahead in financial markets, but we can be confident it'll bounce back at some point." The largest digital asset hit a record high of nearly $74,000 in mid-March, buoyed by a surge of inflows into debut US spot-Bitcoin exchange-traded funds (ETFs) from major players like BlackRock Inc. and Fidelity Investments.
However, demand for these products subsequently waned, and markets failed to gain momentum from the recent launch of spot-Bitcoin and Ether ETFs in Hong Kong. Notably, discounts to net asset value for some of the US portfolios have widened, highlighting the challenges posed by Bitcoin's volatility. On Wednesday, the group of US spot ETFs experienced its largest daily net outflow on record.
Despite the recent slump, Bitcoin and Ethereum have shown signs of recovery. At the time of writing, the Bitcoin price is around $57,700, having made a 0.5% recovery in the past 24 hours. Similarly, the Ethereum price has climbed 2.3% in the past day and is now trading just below $3,000, according to CoinGecko data. However, the past 24 hours saw another $193 million worth of crypto futures contracts liquidated, adding to the $300 million worth of liquidations seen earlier this week.
Economist and trader Alex Krüger noted that the current cycle feels different for traders because it has been largely driven by interest in spot Bitcoin ETFs, which only started trading in January this year. "There has been barely any new retail coming into crypto," he wrote on Twitter. "It's been mostly ETF buyers and previous cycle participants redeploying and going out the risk curve."
The crashing crypto prices were mostly attributed to market fear over certainty among investors that the Federal Open Markets Committee would not lower interest rates. However, when the Fed kept interest rates unchanged, as the majority of investors expected, crypto assets traded sideways.
During a press conference yesterday, Federal Reserve Chair Jerome Powell told reporters that the fight to get inflation to 2% has been difficult but added that he thought it was "unlikely that the next policy rate move will be a hike." President Joe Biden has also expressed optimism that the Fed will lower rates this year, stating, "I do stand by my prediction that before the year is out, there'll be a rate cut."
Looking ahead, the next three to four months are expected to be less bullish and more risk-oriented, as the market closely monitors inflation, employment, and economic data for any unexpected shocks or to gain confidence about potential rate cuts, according to Youwei Yang, chief economist and vice president of crypto miner BIT Mining Ltd.
Bitcoin's April performance has historically been mixed, with four declines over the past decade, three of which presaged May losses averaging 18%, according to Bloomberg data. However, if inflation pressures ease and markets revive bets on a more accommodative Fed stance, crypto and other speculative investments could find some relief.
