Bitcoin (BTC) has not closed above $68,000 since April 11, despite briefly trading above $67,000 multiple times in the past five days. While Bitcoin saw a 2% gain on May 20, it still needs to rise by 7% to reach its all-time high. In contrast, gold reached a record high of $2,450 on the same day, and the S&P 500 index reached its all-time peak of 5,325 points. This has left Bitcoin investors wondering what factors are holding back its progress.
One possible explanation for Bitcoin’s 51% gains this year is that investors are anticipating the monetary expansion that has benefited other assets. When the United States Federal Reserve injects liquidity into the economy to support the troubled banking sector or stimulate economic growth, investors often turn to scarce assets for protection. This tendency is amplified when there is an increased likelihood of an economic recession.
According to data from the Fed, the broader U.S. monetary base (M2) surpassed $21.0 trillion in April 2024, ending a contraction period that began in April 2022 when the M2 indicator reached $22 trillion. This increase in circulating money suggests rising inflationary pressures, even though companies and individuals are currently hesitant to spend. However, it would be naive to assume that the U.S. government will continue to add liquidity if inflation remains a major concern. The Federal Reserve may choose to reduce interest rates while implementing measures to restrain the economy, such as increasing banks’ reserve requirements. This strategy could slow down the expansion of the M2 monetary base in an attempt to achieve a “soft landing” and avoid a recession after a period of high interest rates.
There are several factors that are weighing on Bitcoin’s price, both within and outside of the cryptocurrency market. For example, on May 17, Chinese authorities announced plans to address the country’s troubled real estate market, highlighting the risks of an economic downturn. The People’s Bank of China (PBOC) will provide $42.2 billion to state-owned enterprises to purchase unsold apartments, but some experts doubt that this intervention will effectively resolve the issue. Additionally, the global real estate sector is facing a balance sheet crisis, with borrowers struggling to refinance debt due to rising interest rates. This could potentially lead to the failure of regional and community banks in North America.
Another factor inhibiting Bitcoin’s progress is its limited adoption as a mainstream financial system or means of exchange. While Bitcoin is designed to function independently, it is still not widely used in closed-loop economic systems. As a result, investors often see Bitcoin as a “risk-on asset” rather than a primary hedge option.
Furthermore, concerns have been raised about the potential liquidation of a portion of the $19.4 billion Grayscale Bitcoin Trust (GBTC) fund. Grayscale’s parent company, Digital Currency Group, was significantly affected by the bankruptcy of its crypto lending and trading business earlier this year. If a portion of the GBTC fund is liquidated, it could have a negative impact on Bitcoin’s price.
It’s important to note that this article does not provide investment advice or recommendations. Each investment and trading decision carries its own risks, and readers should conduct their own research before making any decisions.