Bitcoin Slump Triggers Warning of ‘Trouble Ahead’ for Global Markets

(Bloomberg) — Bitcoin’s decline is attracting the attention of investors who see the digital token’s significant swings as a possible precursor to broader changes in risk appetite in global markets.

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The cryptocurrency has lost nearly 4% in the past two days, following a nearly 16% drop in April, the worst monthly decline since the November 2022 collapse of Sam Bankman-Fried’s FTX digital asset empire. The token changed hands at $57,359 as of 11:00 a.m. Thursday morning in Singapore, around a two-month low.

Some investors are mining Bitcoin’s folds for clues about changing liquidity dynamics that could negatively impact other assets. The token has slumped over the past few weeks as the Federal Reserve signals interest rates will remain high for longer; it was a mantra that tightened financial conditions by pushing up Treasury yields and the dollar.

“Bitcoin is our favorite canary,” ByteTree Asset Management Chief Investment Officer Charlie Morris wrote in a note. “This is a warning that there will be trouble ahead in financial markets, but we can be confident that they will rebound at some point.”

“The recent strength in the US dollar may indicate that the market will tighten in the future,” Morris added.

The largest digital asset was BlackRock Inc. in mid-March. It reached a record high of almost $74,000, driven by an influx into the first spot Bitcoin exchange-traded funds in the US, such as Fidelity Investments and Fidelity Investments.

Demand for the products subsequently diminished and markets were unimpressed by the launch of spot Bitcoin and Ether ETFs in Hong Kong this week. Discounts to net asset value have reached record levels for some US portfolios, underscoring the challenges that could arise from Bitcoin volatility.

Read more: Bitcoin ETF Discounts Reach Records After Last Day Sell-Off

Bitcoin has recorded four April declines in the past decade, three of which heralded losses averaging 18% in May, according to data compiled by Bloomberg.

Still, if inflation pressures ease and markets revive bets on a looser Fed stance, crypto and other speculative investments could get some relief.

Fed Chairman Jerome Powell kept hopes alive for a rate cut this year after the central bank wrapped up its last meeting on Wednesday. But he also acknowledged that the explosion in inflation had shaken confidence that price pressures were easing.

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“The next three to four months will be less optimistic and more risk-oriented as the market closely monitors inflation, employment and economic data for unexpected shocks or gains confidence about possible interest rate cuts,” said Youwei Yang, chief economist and vice president. Chairman of crypto miner BIT Mining Ltd.

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