Bitcoin's decline is a warning to global markets

Bitcoin has fallen about 4% in the past two days after falling nearly 16% in April, its worst monthly decline since Sam Bankman-Fried's digital asset empire FTX collapsed in November 2022. .

Some investors believe that Bitcoin's fluctuations could be a clue to changes in the liquidity dynamics of other assets. Bitcoin prices have dropped over the past few weeks as the US Federal Reserve (Fed) signaled interest rates will stay higher for longer, which contributes to tightening financial conditions by promoting Treasury and dollar interest rates.

'Bitcoin is our favorite canary… It's a warning of trouble ahead in financial markets, but we can be confident that it will bounce back at some point' , said Charlie Morris, Chief Investment Officer of ByteTree Asset Management, adding that the recent strength of the US dollar could signal upcoming market tightening.

Bitcoin hit a record high of nearly $74,000 in mid-March as it was fueled by inflows into the first US Bitcoin spot ETFs from major asset managers like BlackRock and Fidelity Investments.

However, demand for these products has since declined and the cryptocurrency market has been unfavorable, so the launch of spot Bitcoin and Ether ETFs in Hong Kong this week has not helped. support the cryptocurrency market. Net asset value declines for some US investment portfolios have widened to record levels, underscoring the challenges that can stem from Bitcoin's volatility.

According to data compiled by Bloomberg, Bitcoin has had four April declines in the past decade, three of which heralded May losses of an average of 18%.

However, if inflationary pressures ease and markets revive bets on the Fed's much looser monetary stance, pressure on cryptocurrencies and other investments could be relieved.

Fed Chairman Jerome Powell still signaled a rate cut this year after the central bank concluded its latest meeting on Wednesday (May 1). However, he also acknowledged that booming inflation has eroded confidence that price pressures are easing.

Youwei Yang, chief economist and vice president of cryptocurrency mining company BIT Mining Ltd. said: 'The next three to four months will be less optimistic and more risk-oriented, markets will closely monitor inflation, employment and economic data to guard against any unexpected shocks or to gain confidence in the possibility of cutting interest rates'.

Isabella Humphrey

Update 03 May 2024