Bitwise’s head of research for Europe has switched gears from a bullish stance on bitcoin (BTC) to a more cautious outlook following last week’s substantial 8% dip. This shift raises concerns about potential deeper losses in the near future.
Bitcoin, renowned as the leading cryptocurrency by market capitalization, experienced a significant drop, plunging 8.8% to nearly $95,000 last week—the largest percentage decrease since August. According to data from TradingView and CoinDesk Indices, this downturn coincided with the Federal Reserve’s indications that fewer rate cuts are anticipated for the following year. Additionally, the Fed reiterated that it cannot hold BTC and isn’t seeking legislative changes to do so.
This more hawkish outlook from the Fed impacted overall market sentiment, resulting in a 2% drop in the S&P 500 and a 0.8% increase in the dollar index, reaching its highest point since October 2022. The yield on the 10-year Treasury note also surged by 14 basis points, indicating a bullish breakout from a preceding technical pattern.
Andre Dragosch, the director and head of research at Bitwise, suggests that a cautious atmosphere may linger for a while. He emphasizes that the Fed finds itself “between a rock and a hard place.” Despite three consecutive rate cuts since September, financial conditions continue to tighten. He points out that recent measures of consumer price inflation are trending upward, reaching new highs as indicated by Truflation’s metrics for U.S. inflation.
Dragosch is one of the few who anticipated a significant rally for BTC in late July when the market was less than optimistic. At the time, BTC hovered around $50,000 and recently eclipsed $100,000 for the first time.
He predicts, “It’s quite likely that we will see more pain in the coming weeks.” However, there’s a silver lining: this downturn could present a compelling buying opportunity, especially considering the ongoing supply deficit of BTC.
As Treasury yields rise, they represent higher borrowing costs and make fixed-income investments more appealing. This typically leads to outflows from riskier assets like cryptocurrencies and stocks. Additionally, a stronger dollar makes USD-based assets pricier, which can discourage capital inflows.
Many analysts have drawn parallels between current inflation pressures and those seen in the 1970s. Dragosch highlights that lately sticky CPI inflation readings are raising alarms at the Fed regarding a potential second wave of inflation, prompting a more cautious approach to rate cuts.
The Federal Reserve appears apprehensive about a double hump inflation scenario, fearing a resurgence reminiscent of the twin peaks of inflation seen in the 1970s. Dragosch notes, “They risk a significant acceleration in inflation if they cut rates aggressively, while inaction could ultimately harm the economy.”
As the financial landscape tightens due to rising yields and a strengthening dollar, the Fed may eventually have to recalibrate its approach. Nonetheless, Dragosch stresses that the supply scarcity of BTC remains a significant bullish factor in the long run, giving Bitcoin enthusiasts a glimmer of hope amid the volatility.
