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Bitcoin’s fall was caused by rising interest rates. Is there more for the crypto king to fall?
As the cryptocurrency space grows, Bitcoin’s story is changing. As the market experiences seismic shifts, the positive momentum of Bitcoin’s leader has been reversed. While there are many reasons why Bitcoin prices have fallen, a significant part of the problem is due to rising inflation rates.
The consumer price index, which is the standard gauge for inflation, increased 8.3% in April from a year earlier. It was slightly lower than March’s 8.5% reading, but still at historic high levels.
The Federal Reserve is pushing for a tighter monetary policy to lower inflation. This was evident in its recent decision to raise interest rates by 50 basis points, the largest increase in over 20 years. Stocks across the board have pulled back in response to the extended sell-off. Bitcoin and other cryptocurrencies, including Bitcoin, have fallen along with them. Bitcoin’s price fell 37% between May 12 and May 12, while it was more than 50% off its November highs.
The market expects inflation will stay above the Fed target. Therefore, the central bank is likely to keep raising interest rates throughout the year. This scenario could be a reality. It is worth looking at these themes to see what it means for Bitcoin, and how crypto investors can react:
- Bitcoin’s correlation to the stock market.
- Bitcoin is maturing.
- How are Bitcoin investors reacting to interest rates?
Bitcoin’s Correlation to the Stock Market
Rising interest rates have had a dramatic impact on crypto. Bitcoin’s price has fluctuated over this period. Bitcoin isn’t the only one. There have been strong correlations over the last few months between Bitcoin movements and stock indicators such as the S&P 500 or the Nasdaq.
This price action is being followed by Bitcoin. Bitcoin is following this price action. The value of the crypto leader fluctuated between $38,000 to $48,000 over months, but it recently fell below $30,000. This indicates that Bitcoin is viewed by investors as a “risk-on” asset.
Bitcoin follows the decline in the equities markets, but not in a dramatic way, according to William Cai (partner and co-founder at financial services company Wilshire Phoenix).
Bitcoin was initially considered an uncorrelated asset relative to the stock market. This means that Bitcoin and traditional assets such as bonds and stocks would not always move in the same direction. The cryptocurrency could be used to diversify your portfolio and protect you from downside risks. Experts expect that the correlation between Bitcoin and stocks will continue to increase in the short- to medium-term.
The current economic climate is ripe for large moves in risky assets. Bitcoin is now accepted as an asset type, however, it’s still considered to be a high-risk asset similar to speculative tech stock. Arcane Research data shows that the 90-day correlation between Bitcoin and the S&P 500 was 0.6333 as of May 9.
Andy Long, CEO of White Rock Management, a global digital mining firm, stated that “short-term to medium-term higher rates likely make for slightly less of a bullish case for BTC in the short-term,”
But in the long term, Long says, in an environment where there are higher interest rates, freer money, and a return of quantitative easing, “BTC is hard money that isn’t going away.”
Bitcoin Is Maturing
The Fed raising rates has prompted a similar reaction from Bitcoin. Bitcoin, despite being around for less than a decade, is slowly becoming a mature asset class, similar to stocks, bonds, or commodities. Cai states that it’s no longer a risky asset and is not a fringe asset that investors can liquidate if they are concerned about volatility.
Cai says that there is more acceptance of Bitcoin now than ever before. “You used to see sell-offs on the Bitcoin market when people became concerned,” Cai explained. Cai states that Bitcoin has become a risky asset class. He says decorrelation will be visible over a longer period of time, but for now, the high correlation is a sign the asset class is maturing.
Cai states, “It’s a good sign that there’s no panic in the industry or underlying technology in times of price drawdowns.”
Cai states that while traders and investors are trying to determine what the next crypto moves will be as asset prices fluctuate, the underlying asset and its adoption by Wall Street has been continuous and continues to drive forward.
How Are Bitcoin Investors Reacting to Interest Rates?
The crypto market is experiencing a slowdown in activity. Experts believe that this is due to the fact that retail investors have reduced their exposure to crypto in order to reduce their risk tolerance. In contrast, institutions have made a significant investment in Bitcoin over the last few years.
Yubo Ruan is the CEO of Parallel Finance. Parallel Finance uses decentralized lending and stakes-taking protocols to help retail investors buy when the market goes up. Retail investors should reduce their exposure at this time, as it is fundamentally a psychological phenomenon in the retail markets.
Hedge funds and crypto-specific venture capital funds are buying the dip. Ruan says that while some are buyers for a short time, many others are long-term investors and are using the market decline to accumulate Bitcoin at a lower price.
Retail investors require cash flow to keep inflation at bay, Ruan states. Ruan says that retail investors can be emotional and will often purchase large amounts of Bitcoin. If Bitcoin drops dramatically, it will need cash flow.
What can investors do in this chaotic cryptocurrency market?
Long states that the best thing to do with Bitcoin is to lock it in a container and see it in five, ten years. Long says that if you try to guess what the market is doing, then the market will be able to fool you.
Ruan believes that Bitcoin will continue to fall in the near future. “We could see a Bitcoin bottom between $20,000 and $25,000,” he said. This would be a good area to accumulate.