Bitcoin Drops Against Rising Bond Yields; What’s Next?

Bitcoin prices fell sharply for the second day in a row on concerns about overvaluations and rising long-term US Treasury yields.

The flagship cryptocurrency fell by up to 17.07 percent, touching an intraday low of $44,888 during the Tuesday session. It pared a portion of its losses ahead of the US session, retreating towards $48,500, but was still down by around 10 percent after the New York opening bell.

The renewed correction in Bitcoin rippled across the entire cryptocurrency market. Many analysts noted that a downside move was overdue because of Bitcoin’s excessive valuations. The cryptocurrency is still up 1,135 percent from its mid-March nadir of $3,858.

Yields Rise

A floor of central bank stimulus to aid the global economy through the coronavirus pandemic last year pushed the interest rates to record lows. Those meager borrowing costs propelled the demand for riskier assets that became the central pillar of the big upside move in Bitcoin and the technology stocks on Wall Street.

Of late, investors started moving their capital out of the risk-on markets, believing that the Fed’s relentless quantitative easing, coupled with the US government’s $1.9 trillion stimulus proposal, would accelerate growth and raise inflation.

Meanwhile, the optimistic prospects also led to a sell-off in long-dated government bonds, causing the yields to drop lower.

Bitcoin rose amid the period of booming bond yields, despite having an erratically negative correlation with it. The upside sentiment appeared as corporates, including Tesla and MicroStrategy, added billions of dollars of bitcoin to their balance sheets to protect it from the US dollar’s devaluation.

That put Bitcoin somewhat in the midst of two conflicting statuses. First, the cryptocurrency acted as safe-haven for investors looking to hedge against the Fed’s pro-inflation policies. Second, its plunge this week alongside US stocks made it look more like a riskier asset.

Bitcoin Uptrend to Continue?

Analysts believe Bitcoin would remain gravitated towards its safe-haven role. Crypto economist Ben Lilly weighed in:

“Typically, rising yields make it more attractive for money to flow out of riskier assets and into a vehicle earning a higher yield – Government bonds in this case. If yields start running higher they can act as a temporary hiccup to the equity and crypto bull markets in the very near term.”

He added that if the Fed scales up their bond purchases then Bitcoin has the possibility of resuming its bull run. Excerpts:

“It’s my opinion that if the dollar starts to gain strength and yields start rising then either the FED or more U.S. government stimulus will take place (early estimates are late March). If so, then it’s back to the races for bitcoin.”

Jerome Powell, the chairman of the Federal Reserve, will shed more light on their bond-buying capacity in his testimony to Congress on Tuesday and Wednesday.