Against the backdrop of the prospect of a rate cut by the Federal Reserve in the United States, Bitcoin has been on a continuous decline in recent months, plummeting over 20% from its historical high in March. Bloomberg analysis suggests that the sudden drop in Bitcoin is causing concerns among investors, who worry that the drastic volatility of Bitcoin may be a precursor to trouble in the global financial market.
Bitcoin reached a historic high of nearly $74,000 in March this year, but had a dismal performance in April with a 16% drop, marking the most severe monthly decline since the FTX crash in November 2022. It then declined by 4% in the first two days of May, hitting a low of below $57,000, the lowest since the end of February.
Will Troubles in the Global Financial Market Arise?
According to Bloomberg, the sharp decline in Bitcoin has raised concerns among investors, who believe that the significant volatility in the cryptocurrency market may indicate broader changes in global market risk preferences. Some investors are looking for clues in the trend of Bitcoin that may impact the liquidity of other assets.
The recent decline in Bitcoin is mainly influenced by the Federal Reserve, with the prospect of higher and longer rates putting heavy pressure on the currency market. Over the past few weeks, the Federal Reserve has repeatedly hinted that rates will remain at their current levels for a longer period of time, delaying the timing of rate cuts. This has pushed up US bond yields, strengthened the US dollar, and tightened the financial environment.
Charlie Morris, Investment Director at ByteTree Asset Management, wrote in a report that the decline of Bitcoin is believed to be a result of reduced demand for products such as the Bitcoin spot ETFs of BlackRock, which saw a significant inflow of funds after approval for listing. However, the market failed to benefit from the launch of Bitcoin and Ethereum spot ETFs in Hong Kong this week.
Data from SoSoValue shows that Bitcoin spot ETFs listed in the US saw a net outflow of $564 million on the 1st, marking the largest single-day net outflow on record. BlackRock’s IBIT also experienced its first outflow of funds since listing, with a net outflow of $36.93 million in a single day.
Macro-economic Conditions Will Continue to Impact the Trend
Bitcoin has experienced declines in the month of April in 4 out of the past 10 years, and in 3 of those years, the average decline in May was 18%. However, Bloomberg believes that if inflationary pressures ease, the market may bet again on the Federal Reserve adopting a more accommodative stance, which could provide some breathing room for cryptocurrencies and other speculative investment targets.
Against the backdrop of the US struggling to combat inflation and a persistently strong economy, the Federal Reserve decided this morning to keep the federal funds rate at 5.25-5.5%, maintaining rates unchanged for the 6th consecutive time. Federal Reserve Chairman Jerome Powell, in a post-meeting press conference, still left open the possibility of rate cuts this year, but also acknowledged that rising inflation has weakened his confidence in the fading of price pressures.
Youwei Yang, Chief Economist and Deputy CEO of cryptocurrency mining company BIT Mining Ltd., stated that the next three to four months will be less bullish and more risk-oriented. The market will closely monitor inflation, employment, and economic data to guard against any unexpected shocks and regain confidence after potential rate cuts.