Bitcoin experienced a significant crash in its price between April 30 and May 1, resulting in an 11.5% decrease to $56,522. This decline led to the liquidation of leveraged long positions worth $172 million, which is relatively low considering the open interest of Bitcoin futures was $28.9 billion before the crash. Therefore, it would be oversimplified to assume that bullish investors were caught off guard.
There is a sense of uncertainty among investors as they await the conclusion of Jerome Powell’s speech following the two-day monetary council meeting on May 1. Powell, the chair of the U.S. Federal Reserve, is expected to maintain interest rates at 5.25%. However, there is skepticism surrounding the ability of the U.S. Treasury Department to finance the government’s budget.
On April 30, the yield on the U.S. Treasury two-year note reached its highest level in five months, climbing to 5.06%. This increase was driven by investors seeking higher returns to offset the heightened risk resulting from the announcement of a $1.07 trillion deficit for the first half of 2024. Since the Fed’s rate hikes in 2023, interest expenses on the deficit have risen by 23% in the first half of 2024 and are expected to continue rising as long as rates remain elevated.
Bitcoin is not the only asset facing declines; worsening macroeconomic conditions have made investors more risk-averse. The Russell 2000 Index, which tracks mid- and small-cap U.S.-listed companies, has fallen by 8.2% in the last 30 days, erasing gains from the previous two months. Similarly, WTI oil prices have dropped 8.3% since April 5, when they reached a five-month peak of $87.91.
A key indicator that Bitcoin’s price correction may be approaching a bottom comes from the traditional markets. Strong first-quarter corporate earnings reports from major companies such as Amazon, Microsoft, Google, Netflix, TSMC, Samsung, Coca-Cola, Morgan Stanley, Citigroup, HSBC, and Barclays have temporarily shifted investor focus away from Bitcoin and other risk-on assets. However, traders may seek alternatives if the Fed decides to maintain higher rates for an extended period.
Bitcoin miners are facing significant challenges following the halving on April 20, which reduced their rewards by 50% to 3.125 BTC per block. While estimates of miners’ outflows to exchanges show no signs of capitulation for now, significant downtrends in the Bitcoin price could force large miners to sell off their holdings.
Another indication that Bitcoin’s downturn may be nearing its end is the resilience of miners, who have been reluctant to sell despite a 57% drop in the Hashrate Index. This index measures the daily expected return of one terahash of hashing power, taking into account network difficulty, Bitcoin’s price, and transaction fees.
To gain insight into the broader sentiment in the cryptocurrency market, it is worth examining the demand for stablecoins in China, particularly USD Coin (USDC). The premium on USDC transactions over the official U.S. dollar rate can shed light on the activities of retail investors, indicating whether they are entering or exiting the cryptocurrency markets.
On May 1, the premium for USDC in China increased to 2.7%, indicating a strong demand for converting Chinese yuan into USDC. This sustained interest suggests a positive sentiment toward cryptocurrencies in China, which bodes well for Bitcoin’s outlook despite its recent 20% price decline over three weeks.
However, while market sentiment may improve following the release of the Federal Reserve’s notes and the realization that fears of miner capitulation are unfounded so far, the situation in U.S. markets tells a different story. Net outflows from U.S.-listed spot exchange-traded funds amounted to $635 million in the past five trading days, indicating that investment flows play a crucial role in determining Bitcoin’s price movements, with no guarantee that the $56,500 support level will hold.
It is important to note that this article does not provide investment advice or recommendations. Every investment and trading decision carries risks, and readers should conduct their own research before making any decisions.