Bitcoin prices fell Tuesday, halting a wild upside move in the previous session as investors continued to assess the volatility in the government bonds market.
The flagship cryptocurrency dropped by up to 4.90 percent to $47,201 in recent trading, pulling back after establishing a week-to-date high above $50,000. Traders continued to remain uncertain about Bitcoin’s short-term bias as its correlation with US stock indexes grew amid rising bond yields.
Traditional investors agreed that they now look for more cues from the Federal Reserve on how monetary policies could shift down the road. That will determine their appetite for Treasurys and inflation-adjusted returns. A flood of the US dollar liquidity by the central bank since the pandemic has pushed the bond interest rates lower and fueled a rally in riskier markets, including bitcoin and stocks.
But the phenomenon has changed in recent weeks. Money managers sold off their government debt holdings in anticipation of an economic rebound and higher inflation. Yields rallied last week as bonds plunged, leading to a decline in both the stock and bitcoin markets. On Monday, however, a stabilized debt market helped to push US equities and cryptocurrencies upward again.
“The state of the bond market is driving everything,” said Fahad Kamal, chief investment officer at Kleinwort Hambros. “The central banks continue to be the real pivot in markets right now: as long as they continue to buy enormous amounts of bonds in the market, the upside move [in yields] is capped.”
Bitcoin Holds Support
Fed has so far ensured that a rise in bond yields reflects optimism for economic growth in the US. Meanwhile, its chairman Jerome Powell said last week that they would keep interest rates near zero and keep buying bonds until they achieve maximum employment and an inflation target at or above 2 percent.
Ben Lilly, a crypto researcher, noted that a dovish statement from Fed this week could revive Bitcoin’s bullish trend. Nevertheless, if the central bank turns even mildly hawkish, investors would prefer to sell perceivable overvalued assets like tech stocks and cryptocurrencies to seek safer alternatives like cash.
“The more central banks around the world purchase assets, keep yields low, and continue to add more ink cartridges to the money printer, the more vertical this cycle might be,” Mr. Lilly wrote in his weekly newsletter.
“However, if the FED decides to change course and tighten up, this can act as a major headwind for crypto. That’s because in such an environment capital will be less likely to flow into assets at the tail end of the risk curve… Aka crypto,”he added.
Technically, Bitcoin was maintaining its short-term bullish bias above its 20-day moving average near $47,500.