A sharp increase in interest rates pushed Bitcoin prices to a low for the year on Monday. Liquidity has been key to the support of cryptocurrency assets, and as the Fed begins its $45 billion per month bond tapering program, fears that liquidity could dry up has pushed Bitcoin towards becoming one of the weakest performing assets of the year.
The Bitcoin/USD exchange rate ended May 9th down 33% on a year-to-date basis. The crypto ended a 5-day slide on Tuesday morning, after briefly crashing below $30,000 in the previous day. Bitcoin has also slid 50% in the last six months, far greater than the correction in the Nasdaq 100 Index.
Surging inflation has forced the Federal Reserve to raise rates and withdraw liquidity from the financial system, pushing high-risk assets such as growth-oriented technology shares and cryptocurrencies into a bear market, which is officially defined as a slide of 20% or more from recent peaks.
Furthermore, the war between Ukraine and Russia could push the global economy towards stagflation, which is the phenomena of muted GDP growth combined with soaring inflation. In such an environment, investments that do not generate a cash-yield suffer the most from deteriorating investor sentiment.
Additionally, the mining of the cryptocurrency requires large amounts of energy just as energy prices surge (specifically natural gas) and power bills soar across the world. Companies in the bitcoin mining field such as Marathon Digital and Riot Blockchain hit their 52-week lows recently, dropping over 90% from their all-time highs as margins get compressed due to higher utility costs.
Increased regulatory scrutiny is also impacting risk appetite. The U.S. SEC has recently proposed changes to the supervisory regime of crypto assets such as stable coins, decentralized finance platforms and currencies. Cryptocurrencies utilizing the blockchain have also not gained widespread adoption for payments, with Bitcoin and Ethereum accounting for fewer than 0.1% of all transactions in the U.S.
We believe the outlook for cryptocurrencies will remain challenged in the short-term given that the liquidity paradigm that was so supportive of the asset class in the past is currently undergoing a major shift.
Even though technical bounces from support levels will occur frequently, the general trend for Bitcoin specifically could be bearish to sideways at best. As the Fed moves deeper into its rate hike cycle, we expect that certain high-risk assets could begin to trough and slowly start trending up towards the end of the year.
This content is provided for general information purposes only and is not to be taken as investment advice nor as a recommendation for any security, investment strategy or investment account.
