Why bitcoin’s recent crash may be more than it seems

Why bitcoin’s recent crash may be more than it seems

Are institutional investors going beyond the HODL?

Financial analysis provided by Krisada Yoonaisil, Financial Markets Strategist at Exness

10 January  2024 marked a historic moment for bitcoin. After a long battle engaging the SEC and multiple institutional players in the US, the financial watchdog finally approved the listing of 11 Spot Bitcoin ETFs. It was a breakthrough for the crypto markets, ushering in a new era.

Led by key financial players like Grayscale, BlackRock, and Vanguard, the crypto ETF listing signaled the alarm for crypto holders. Bridging the gap between “traditional” investing and digital assets, the launch of the BTC ETFs proved that cryptocurrencies are, in fact, an essential part of mainstream finance.

Much of bitcoin’s popularity draws from its unique potential to redefine money on a global scale. Although highly volatile, given its intrinsic growth aspect, which makes it increasingly more sensitive to economic events, bitcoin is still one of the most widely adopted cryptocurrencies. 

Numerous factors contribute to bitcoin's value. Bitcoin can be transacted seamlessly across jurisdictions peer-to-peer, creating immense potential for IoT and a cryptocurrency value chain. This facilitates friction-free digital asset movement at a low cost, almost in real time.

This makes bitcoin available to anyone, anywhere globally, allowing more people to participate in the global financial system. Furthermore, given its decentralized nature, Bitcoin is not subject to monetary policy changes and is only affected by them due to its correlation with tech stocks and the US dollar. Plus, bitcoin has a fixed supply of 21 million units in its code, which underpins its value.

The new world order and the bitcoin rush

Some analysts liken bitcoin to digital gold, and it recently grabbed the headlines with its steep price movements. President Donald Trump’s return to the White House earlier this year galvanized the world with his unprecedented measures. 

From punitive tariffs against Canada, Mexico, China, and the EU to deregulation measures aimed at boosting the crypto market, his policies, wrapped in the “Make America Great Again” package, propelled bitcoin above 100,000 USD, that mark that no crypto had surpassed before.

Crypto bulls were eager to capitalize on the move, rushing to buy more, urged by Trump’s pledge to create a Crypto Reserve. According to an account ordered by the White House crypto and AI “Czar” David Sacks, this digital asset reserve currently amasses 200,000 USD in bitcoin alone.

However positive this might sound to bitcoin holders, it must be correlated with the bigger picture. Now that Trump’s stance regarding tariffs and the Russia-Ukraine war has become clearer, the markets are bracing for a new world order and tighter economic measures going forward.

With US inflation still hovering above the Fed’s 2% target and the shockwaves sent by Mt. Gox’s debt settlements accounting for tens of thousands of US dollars worth of bitcoin released onto the market, bitcoin tanked below 80,000 USD overnight between March 10 and 11, amid a massive sell-off.

On 12 March, bitcoin rose timidly above 84,000 USD, bolstered by US inflation and February CPI data. Disappointing by 0.1%, the headline CPI (2.8% vs. 2.9%) and Core CPI (3.1% vs. 3.2%) readings showed a deterioration of consumer confidence eroded over the past month. Could this be the start of a new bull run? The reality is more complex.

What’s next for bitcoin?

Despite the crypto market’s jubilation over the tepid economic data, crypto investors should remain cautious about the future. Analysts suggest that the recent gains in Bitcoin and other altcoins, including XRP, up 6%, Dogecoin, up 4%, and Cardano, up 2% on 12 March, may not be long-lasting.

On the one hand, President Trump’s toing-and-froing with tariffs on imported goods from China, Canada, and Mexico is only triggering further market jitters. Consequently, many Americans can only expect the prices of goods imported from these countries to rise in the near future. 

On the other hand, the President’s declination to overrule the possibility of an imminent recession in a Fox News interview further worried investors. Additionally, the eagerly anticipated Trump crypto policy changes a week prior also landed with somewhat of a jarring sound. 

Instead of making new cryptocurrency purchases that would significantly boost digital asset prices, Trump announced that the government would use its current crypto holdings - most of which have been acquired through government seizures - to beef up its stockpiles.

That said, it might get worse before it gets better. Yet, not all is lost. Bitcoin and the broad crypto market are known for their volatility amid transition periods. Investors should also bear in mind the correlation between crypto assets and tech-heavy NASDAQ, which, in bitcoin’s case, may vary significantly from that of altcoins, which tend to be more closely correlated with the tech-driven index.

This has led some analysts to liken bitcoin to an inflation hedge. Meanwhile, if you’re planning to invest in bitcoin soon, keep an eye out for the latest market movements and their impact on the financial markets at large.