Bitcoin is falling for the third consecutive day by around 1%, giving up the $64,000 level.
The decline in Bitcoin comes amid tight liquidity conditions that do not allow the cryptocurrency to sustain its upward trend for long, as a short-term speculative trend dominates.
Additionally, the Federal Reserve’s hawkish monetary policy outlook and uncertainty have exacerbated liquidity constraints by keeping bond yields high.
Earlier this week, Bitcoin rebounded slightly following an agreement to halt the war in the Middle East. This lowered oil prices and brought relief to broader markets, but capital remains hesitant to shift into cryptocurrencies.
Moreover, the appeal of the stock market remains strong despite the recent correction. Unless we see a significant and prolonged loss of momentum in this market, it is unlikely that we will see capital shifting back toward cryptocurrencies sufficiently anytime soon. Meanwhile, there is nothing to suggest that the stock market is heading for a deep or prolonged correction, given strong corporate earnings, the continued dominance of the artificial intelligence narrative, and the massive flows that index funds have sustainably attracted, unlike Bitcoin.
Bitcoin spot ETFs have been unable to attract significant, sustainable inflows for months. Following a long series of outflows, we see only a few million dollars in inflows, after which we return to much larger outflows, according to numbers from SoSoValue. This suggests that these flows are speculative and limited to capturing short-term trends.
Meanwhile, meaningful growth in flows is currently limited to the futures market. From Saturday until the day before yesterday, open positions for Bitcoin futures increased by about 4 billion dollars to 49 billion, according to figures from CoinGlass. The growth of the speculative side without real capital inflows carries the risk of large-scale liquidations of long positions, which could wipe out the fragile price momentum.
To make matters worse for Bitcoin, the cautious tone from the new Federal Reserve chair, Kevin Warsh, has increased uncertainty about the future path of monetary policy. Even after signing the memorandum of understanding in the Middle East and a drop in oil prices, it has become unlikely that rates will remain at their current levels until the end of this year. There is nearly an 85% probability that we will see an interest rate hike of at least a quarter of a percentage point before the end of the year, and by 65% that it will start this coming September.
The hawkish stance on monetary policy puts pressure on cryptocurrencies by reducing the funding sources for speculative liquidity that rely on leverage. As bond yields increase, the cost of this funding goes up. This is compounded by the rise in Japanese Government Bond yields and the Bank of Japan’s shift toward tightening monetary policy. In contrast, stocks remain resilient despite tight monetary conditions, unlike cryptocurrencies. This resilience is expected to maintain a steady inflow of capital into the stock market while attracting less cryptocurrencies in the near future.
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