Bitcoin prices have dropped over 50% over the past few weeks. As fears of a Chinese government crackdown on cryptocurrency have escalated, investors have fled what was once the world’s most popular digital currency.
Bitcoin prices have fallen below $38.0k as investors hoard billions of dollars with the US Federal Reserve.
Bitcoin (BTC) suffered when investors moved a record amount of money into the Federal Reserve’s overnight fund after the central bank began paying interest on the money. On Thursday, the Federal Reserve received $756 billion from nearly 70 market participants in a buyback program. That’s about $172 billion more than last week and about $235 billion more than Wednesday, when only 53 investors claimed the fund. The repo facility mainly accepts liquidity from money market funds and public banks. Until Wednesday, the service offered eligible users a zero percent refund. But after the Federal Reserve indicated that interest rates would rise faster and earlier – in 2023 instead of 2024 as previously expected – the institution raised the refinancing rate to 0.05% and the interest rate on excess reserves that banks place on deposit from 0.10% to 0.15%. Fed rate hike stimulates demand. Source: FT, Federal Reserve, Bloomberg
Investment of surplus cash for interest purposes
Largely as a result of quantitative easing in the US economy, excess dollar liquidity flows into money market funds, which then invest it in short-term government securities. The increased demand for these securities has often resulted in their returns becoming negative. Total financial assets held in money market funds before and after recessions (shaded). Source: FRED Negatively yielding stocks in response to the Fed’s quantitative easing have proven to be one of the main bullish catalysts for bitcoin and other digital assets since March 2020. Compared to traditional debt, the cryptocurrency sector promised higher returns and, in some cases, sustainable returns from the evolving decentralized financial industry. But with the Fed’s hawkish tone sending markets into a curveball, traditional investors are turning to targets that seem less risky than bitcoin or gold and promise decent returns. As a result, the Fed’s repo market is experiencing the largest cash inflows. We seem to be seeing an increasing inverse correlation between the price of bitcoin and the Fed’s repo market, said Peter Koziakov, co-founder and CEO of cryptocurrency wallet service Mercuryo. He added: Many investors choose the more volatile bitcoin because it promises higher returns. However, given the current market trends, some BTC investors may be winding down their positions as the dollar’s prospects are crucial at the moment. The U.S. dollar, which is also seen as a safe haven in the face of uncertainty in markets, rose to 92.70 against a basket of major foreign currencies on Friday. In dollar terms, this is the highest level since mid-April. Bitcoin reacted negatively to the strengthening dollar. Bitcoin and US Dollar Index reaction to Fed interest rate hike signal [so far]. Source: TradingView.com.
Will bitcoin win?
According to Raul Pal, founder and managing director of Global Macro Investor, the rising dollar has killed the inflation story. Still, the macro analyst pointed out that the Fed’s rate cuts will not hurt alternative hedging instruments like bitcoin and gold in the long run. Related: Diversifying into bitcoin is a good move, according to a Bloomberg strategist. He noted that the U.S. government tends to promote more stimulus measures that widen the Fed’s balance sheet. This means that the central bank continues to buy government bonds, causing bond yields to fall. Pal said: I still think the 2nd. The economic outlook is weaker than expected in the first half of the year, inflation fears are abating for the time being and growth is not sustainable. This will lead to more stimulus (rather than tightening) in the fourth quarter.US 10-year government bond yields have fallen after every recession since 1980. Source: Bloomberg, Global Macro Investor The analyst added that the dollar’s recovery trend will stabilize in the second half of 2021. Capital will eventually return to the gold and cryptocurrency markets.
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