After struggling in May, Bitcoin (quotation BTC) came out of its slump today and is up nearly 5% in the past 24 hours as of this writing. Investors are still down more than 34% this year and are trying to find a bottom in what has been a long and difficult year for cryptocurrencies. So what is driving Bitcoin up today and has the token finally hit rock bottom? Let's take a look.
Bitcoin has come under intense selling pressure this year and has largely moved with broader markets, trading similarly to technology and growth stocks. With soaring inflation and the Federal Reserve's orientation towards rapid and aggressive hikes in the federal funds rate, the overnight rate at which banks borrow from each other, cryptocurrencies have sold like other rising stocks. This is partly due to the fact that, as the federal funds rate increases, the yields of safer assets, such as US Treasury bills, also increase. This makes risky assets such as Bitcoin, which experienced an incredible run in 2021, much less attractive.
Furthermore, the Fed has begun the arduous task of reducing its balance sheet by $ 9.000 trillion in a process known as quantitative tightening, by reducing the amount of bonds it holds on its balance sheet. By August or September, the Fed plans to reduce its bond holdings by $ 95 billion a month, which means it could reduce its balance sheet by more than $ 1.100 trillion in one year. While the impact of this measure is more or less unknown, the Fed will essentially take liquidity out of the economy, potentially leaving less funds for riskier assets like cryptocurrencies.
"We believe this relief rally is a bull trap and that bitcoin may have a short-lived gain, but it is more than likely to resume the downtrend we have seen in the past couple of months," Josh Olszewicz said this morning. by Valkyrie Investments, CNBC reported. "Uncertainty in the global economy due to high inflation and the likelihood of a recession, coupled with the prevalence of central bank rate hikes, will likely force all assets to fall at least until the end of the summer."
One possible explanation for the Bitcoin rush today is that the Chinese government is lifting restrictions on major cities that were put in place after the country saw a resurgence in COVID-19 cases earlier this year. Some cities like Shanghai have been closed for months. This could alleviate supply chain problems, helping to reduce inflation. If inflation were to decline real and steady, the Fed could be less forced to raise rates or conduct such an aggressive quantitative squeeze.
Has Bitcoin hit rock bottom?
At this point, I have no idea if Bitcoin has hit bottom and would never recommend trying to predict or predict a market bottom or top. Rather, you should invest in assets that have good long-term value.
I believe Bitcoin may go down in the near term because the Fed's monetary policy is still unclear. The market currently expects three half-point hikes this year and a quantitative squeeze that will continue. This will have the effect of making assets more secure and flushing liquidity out of the economy, two factors that could damage Bitcoin's appeal and drive its price down.
In the long run, though, I expect Bitcoin and at least other cryptocurrencies to stay around and generate good value. For this reason, I consider the decline in Bitcoin this year a good opportunity, although more volatility may occur in the short term.