Bitcoin’s Fall at $90K Led by Reduced Fed Rate Cut Odds

Main Receptors:

Strong demand for US Treasurys and low Fed rate cuts indicate that investors are shifting to safe-haven assets, reducing demand for Bitcoin.

Economic weakness in Japan and soft US jobs data will increase pressure on Bitcoin, limiting its use as a hedge in the near term.

Bitcoin (BTC) failed to hold above the $92,000 level last month, which led market participants to develop several explanations for the price weakness. While some traders point to outright market manipulation, others say the concern surrounding the artificial intelligence sector has waned despite the lack of concrete evidence to support these claims.

The S&P 500 traded 1.3% below its all-time high on Friday, while bitcoin remains 30% below the $126,200 level reached in October. This divergence reflects rising risk aversion among traders and undermines the narrative that fears of an AI bubble are driving broad market weakness.

Regardless of Bitcoin's decentralized nature and long-term appeal, gold has emerged as the preferred hedge amid ongoing economic uncertainty.

Fed balance sheet reduction drains liquidity, Bitcoin nears $90k

One factor limiting Bitcoin's ability to rally above $90,000 is the US Federal Reserve's plan to shrink its balance sheet until 2025, which aims to eliminate liquidity from financial markets. However, this trend reversed in December, as signs of a deteriorating labor market and weak consumer data raised concerns about future economic growth.

Retailer Target cut its fourth-quarter earnings outlook on Dec. 9, while Macy's warned on Dec. 10 that inflation will weigh on year-end sales. Most recently, on December 18, Nike reported a drop in quarterly sales, sending its shares down 10% on Friday. Historically, falling consumer spending has been favorable for assets considered higher risk.

Although there are clear signs of a shift to a less restrictive monetary stance, traders expect the US Fed to cut rates in 2018. They are increasingly confident of its ability to cut interest rates below 3.5 percent by 2026.

The odds of an interest rate cut at the Jan. 28 FOMC meeting fell to 22% Friday from 24% Friday, according to the CME FedWatch Tool. Above all, demand for US Treasurys remains firm, with the 10-year yield at 4.15% on Friday after briefly dipping below 4% in late November. This behavior indicates a growing risk aversion among traders, which contributes to weak demand for Bitcoin.

Bitcoin's correlation with traditional markets has been declining, but that doesn't mean cryptocurrency investors are immune to soft economic conditions. Weak demand for Japanese government debt has added to contagion concerns, with the country's 10-year bond yield above 2% for the first time since 1999.

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Japan has the fourth largest gross domestic product in the world, and its domestic currency, the yen, has a monetary base of $4.13 trillion. The country's 2.3% annualized GDP contraction in the third quarter is noteworthy, as Japan maintains negative interest rates for more than a decade and relies on its currency to stimulate economic activity.

Bitcoin's struggle near $90,000 reflects uncertainty over global growth and weak US labor market data. Investors are more risk averse, lower interest rates and the positive effect on risky assets is reduced. As a result, even if inflation rises again, Bitcoin cannot be used as an alternative hedge in the near future.

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