Bitcoin's price took a significant hit, falling by 4.1% in late September, briefly dropping to $63,500. The decline erased the gains made over the previous week, marking another period of turbulence for the cryptocurrency market. While this dip wasn't catastrophic in terms of liquidations-under $40 million in leveraged long futures were liquidated-it underscores broader market concerns. Traders are grappling with a host of external factors, including economic uncertainty in the U.S. and fears of a bubble in the artificial intelligence (AI) sector, both of which are fueling investor caution.
The U.S. economic outlook is casting a long shadow over the financial markets, including Bitcoin. Investors were closely watching Federal Reserve Chair Jerome Powell's comments on the economy, as fears mount over weakening sectors such as services and manufacturing. Aditya Bhave, a U.S. economist at Bank of America, wrote that "the labor market is the biggest risk to our outlook," according to Yahoo Finance, further adding to investor uncertainty. With the stock market showing signs of potential slowdown-futures for the S&P 500 slipped 0.20%-Bitcoin's price, which often correlates with equities, reflected the same nervousness.
Adding to the complexity are growing fears of an AI bubble. Some experts, like Mike Fishbein, author of the AI Marketing Brief, believe that the burgeoning AI sector may be overhyped. Fishbein noted that while the underlying technology, such as large language models, remains revolutionary, the cost dynamics are rapidly changing. Companies are still charging hefty subscription fees, despite the plummeting costs of running these services, a trend Fishbein thinks could lead to lower profitability and less demand for costly AI infrastructure. Should this bubble burst, it could lead to a market-wide correction, with investors retreating to safer assets like government bonds.
Meanwhile, Europe's economic woes are exacerbating global concerns. Leading automaker Stellantis recently lowered its margin outlook for the year, leading to a 14% drop in its stock price on the Netherlands exchange. Volkswagen, too, has hinted at the possibility of factory shutdowns in Germany for the first time in its 87-year history, pointing to weak demand from China and energy supply issues stemming from the conflict in Ukraine. Bloomberg reported that Germany, the largest economy in Europe, could see zero or even negative growth in 2024, a troubling sign for the global economy.
The Middle East also looms large in the minds of investors, with escalating tensions in the region. Following attacks in Lebanon, Israeli Prime Minister Benjamin Netanyahu warned that the actions taken so far would not be enough. Any significant disruption to oil supplies from the region could push inflation higher, complicating the Federal Reserve's efforts to continue cutting interest rates. Rising oil prices could force the Fed to pause its rate cuts, limiting the potential for economic stimulus and creating additional pressure on risk assets like Bitcoin.
In parallel, Bitcoin faced additional technical headwinds in the futures market, with data pointing to a "long squeeze" as a key driver of the recent price drop. Research from CryptoQuant indicated a spike in long liquidations in the perpetual futures market, forcing leveraged traders to sell or face liquidation. Over 64,000 traders were liquidated within 24 hours, with Bitcoin accounting for nearly $49 million of the total $181 million in liquidations across cryptocurrency exchanges.
According to CryptoQuant's head of research, Julio Moreno, this marked the seventh instance since March 2024 where open interest in Bitcoin futures exceeded $18 billion, each time followed by a price decline. "The futures market shows signs of overheating, with open interest around $19.1 billion," Moreno said, signaling potential caution ahead.
Global market conditions also contributed to Bitcoin's struggles. In Japan, the appointment of Shigeru Ishiba as the country's new prime minister has sparked speculation about potential interest rate hikes by the Bank of Japan (BoJ), a shift that could have far-reaching implications. Ishiba is aligned with BoJ Governor Kazuo Ueda in supporting rate hikes, which would lead to a stronger yen but also added volatility in global financial markets. The anticipation of these hikes caused Japan's Nikkei 225 index to plummet by 4.8%, its sharpest decline in eight weeks, a move that rippled through international equities markets.
