Bitcoin (BTC) ran into selling pressure early Wednesday after a top Federal Reserve (Fed) official said there is no compelling case to halt the liquidity tightening. The Fed’s unrelenting tightening has roiled risk assets, including cryptocurrencies.
“I don’t really see a compelling reason to pause,” Federal Reserve Bank of Cleveland President Loretta Mester told FT in an interview published on Wednesday. “I would see more of a compelling case for bringing the rates up and then holding for a while until you get less uncertain about where the economy is going,” Mester added.
Bitcoin, a pure play on the dollar liquidity, fell by nearly 2% to $27,021 after Mester’s comments were published, CoinDesk data shows. Futures tied to Wall Street’s tech-heavy index Nasdaq fell by 0.38%, hinting at a negative open on Wednesday.
The largest crypto coin bounced 84% from the turn of the year through mid-April, briefly scaling US$31,000 (RM143,360), but the climb has since fizzled to 64%. Ebbing liquidity and restrictive monetary policy have curbed enthusiasm for crypto.
The dollar index, which tracks the greenback’s value against major fiat currencies, rose 0.27% to 104.40. Gold remained resilient, trading 0.2% higher at $1,962 per ounce.
The Fed has raised rates by 500 basis points to 5% since March 2022 to tame inflation. Mester’s support for another rate hike and the higher-for-longer stance comes on the heels of hotter-than-expected inflation data and validates the recent hawkish repricing of interest rate expectations in the U.S.
Official data released last Friday showed the consumer spending in the U.S. increased more than expected in April even as the Fed’s preferred inflation measure, the core PCE rose to 4.4% on a yearly basis in April from 4.2% in March. Per the Fed funds futures, traders no longer expect the Fed to cut rates this year and have fully priced in a 25 basis point rate hike for June.
Over the past seven months, traders consistently hoped that the Fed would pause its rate hikes in the first half of 2023 and resort to liquidity-boosting rate cuts in the second half. That’s one of the significant reasons behind bitcoin’s year-to-date gain of over 65%.
The cryptocurrency clocked a 10-month high of $31,000 in April. The dollar index dropped by over 12% in the seven months to April. Mester added that the debt ceiling deal removes a “big piece of uncertainty” from the U.S. economy.
Crypto geeks had seized on the collapse of US regional banks in March as validating a distrust of fiat currency, sparking gains for Bitcoin, but that proved to be a temporary prop as officials steadied the financial sector.
“What you really need to do to get another wave of Bitcoin and crypto-asset buying is to show real utility and development to get those crypto curious people to get into the crypto ecosystem,” John Wu, president of Ava Labs Inc, said on Bloomberg Television.
The Bitcoin network has seen a flurry of activity this year involving meme coins and nonfungible tokens. That pressured Bitcoin earlier in May by causing a spike in blockchain congestion and transaction fees, which has since eased.
Assets like stocks, bonds and gold fared better than crypto over the past four weeks. Hype over artificial intelligence (AI) was particularly intense, stealing the limelight and spurring a more than 10% gain in an index of AI-linked shares.
“Crypto is losing out to tech stocks that have a stronger narrative with the AI and ChatGPT stories driving investor interest,” said Markus Thielen, head of research at Matrixport. Meme coins like Pepe are seeing “very low” turnover, indicating a lack of investor engagement, he added.
Traders are also evaluating the implications of the US debt-limit deal, which Congress is racing to pass before June 5, the date by which the nation could default. If the deal is approved, it could lead to a deluge of bill sales that sucks liquidity out of markets.
“Liquidity impacts tend to be more visible over longer horizons,” said Caroline Mauron, co-founder of digital-asset derivatives liquidity provider OrBit Markets. “Large Treasury issuances that may follow the deal are unlikely to materially affect the Bitcoin price in the short term.”
Bitcoin fell more than 2% to US$27,150 as of 8.22am in London on Wednesday (May 31). Smaller coins such as Ether, Solana and Avalanche also slid. Bitcoin remains about US$42,000 off its 2021 peak after a partial revival from last year’s rout.
-Bloomberg
