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Elon Musk Caused Bitcoin Dump, But Hawkish Fed Minutes Could Accelerate It

Bitcoin, Elon Musk Caused Bitcoin Dump, But Hawkish Fed Minutes Could Accelerate It
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Goris (CoinChapter.com) — Bitcoin lost almost a third of its market valuation earlier this week after Elon Musk injected a dose of fear into the market by saying that its electric vehicle business Tesla would unload its entire BTC collection.

Later, the billionaire investor said that Tesla won’t go ahead with the dump strategy. But by then, the cost to purchase one Bitcoin had come down to as low as $30,000 as of Wednesday.

The flagship cryptocurrency later recovered some of its bullish bias. It rose back above $40,000 on dip-buying sentiment among short-term traders.

Read more: Guggenheim CIO Calls Bitcoin a ‘Tulipmania’

Many analysts noted that the BTC/USD exchange might continue its recovery rally in the sessions ahead. Meanwhile, some also indicated that the pair’s bid could easily fall back below $30,000, insomuch that it reach its 2017 record high of $20,000.

Tapering Woes

The bearish analogies have one major backer: the Federal Reserve. On the day Bitcoin fell to $30,000, the US central bank released the minutes of its Federal Open Market Committee’s meeting from April.

Bitcoin recovers after crashing $30,000 earlier this week
Bitcoin recovers after crashing $30,000 earlier this week. Source: BTCUSD on TradingView.com

The summary revealed that many Fed officials are in favor of curtailing its vast monetary support to the US economy. That includes the $120 billion-month bond-buying program that the Fed began in April 2020 to cushion the impact of the COVID-19 pandemic on the US markets.

Read more: Bitcoin Falls After Federal Reserve’s Extended Quantitative Easing Assurance

Bitcoin was one of the biggest beneficiaries of the Fed’s quantitative easing policies. The flagship cryptocurrency rose by as much as 1,582 percent from its mid-March 2020 nadir of $3,858, with many analysts noting that lower bond yields caused by Fed’s debt purchasing experiment sent institutional investors looking for alternatives in riskier safe-haven assets.

Most of the investors that hold Bitcoin in current times do so because they see the cryptocurrency as a defense against the Fed’s monetary policies. They note that the US central bank’s money printer would eventually crash the US dollar. In turn, it would lead to higher consumer and commodity prices that would send more people to the safety of cryptocurrencies thanks to their limited supply economic models.

Waning Demand

But with the latest FOMC outlook suggesting a different scenario, Bitcoin’s upside bias faces the prospect of paring itself down.

“Several participants suggested that if the economy continued to make rapid progress toward the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”

— read the Fed minutes.

The announcement accelerated sell-off in the US government debt market, with the yield on the benchmark 10-year note surging 38 pips higher to 1.675 percent. That upped the prospect of holding bonds among foreign investors.

Meanwhile, Bitcoin’s price rebound coincided with a dip in 10-year bond yields the next day.

US 10-year Treasury note yields. Source: US10Y on TradingView.com
US 10-year Treasury note yields. Source: US10Y on TradingView.com

The cryptocurrency expects to maintain above bullish price floors like $30,000 over inflation fears. Last month, the US Labor statistics showed a weaker than expected job growth. Meanwhile, data showed a spike in consumer price inflation to above 4 percent, showing aggressive mismatches between labor records and the Fed’s inflation trajectory towards 2 percent.

Read more: Bitcoin Week Ahead Ep04: Elon Musk Market Manipulation Clouds FOMC Setup

The minutes noted higher inflation readings as “transitionary” — a response to the sudden reopening of the US economy that led to surge in demand for goods and services. It further stated that inflation would become “consistent with achieving the committee’s objectives over time” — near 2 percent.

What Bitcoin Analysts Think

Willy Woo, an on-chain analyst, said in his newsletter that Bitcoin would keep rising because its “long range macro indicators remain healthy.” Excerpts:

“We’re not at a macro market top, valuation is well within fundamentals, investor volumes look good, new users coming into the network remain strong and most telling, we are free from mania patterns seen at macro market tops.”

Clem Chambers, the CEO of financial research website ADVFN.com, differs with a bullish Bitcoin analogy. In his Seeking Alpha note, the veteran said that the cryptocurrency market, on the whole, is due for a major crash following its wildly volatile bull run in the previous 12 months.

“If we see the low $30,000s soon, it will then be a question of will we see $10,000-$20,000,” he wrote. “To me, that’s possible because when the ‘I bought at the top’ brigade stampedes for the exit, it will get extremely spicy.”

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Yashu Gola

Yashu Gola is a Mumbai-based finance journalist. He is profoundly active in the bitcoin space since 2014 – and has contributed to several cryptocurrency media outlets, including CoinChapter, NewsBTC, FxDailyReport, Bitcoinist, and CCN. Academically, Yashu holds a bachelor's in information technology, with majors in data structures and C++ programming language. He has also won the 'Atulya Award' for his efforts towards raising $100,000 for an India-based farming project.

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