Bitcoin prices slumped to a 12-day low on Tuesday, extending Monday's double-digit fall from record highs.
The biggest cryptocurrency by market value reached as low as $45,047 at 09:10 UTC – the lowest level since Feb. 11 – having dropped from the record high of $58,332 to below $48,000 on Monday, according to CoinDesk 20 data.
Bitcoin looked overbought at record highs and due for correction – more so, as the cryptocurrency's appeal as inflation hedge was somewhat diluted by the recent rise in the inflation-adjusted U.S. treasury yields.
The macro picture, however, might bring the return of bullish pressure, as analysts expect Federal Reserve Chair Jerome Powell to tell Congress later today that the central bank is committed to keeping interest rates low.
The U.S. central bank is also likely to continue with its liquidity-boosting bond purchase program, despite a recent rise in inflation expectations and an improving growth outlook. That will likely push bond yields lower and put a floor under both equities and bitcoin.
"The recent spike in yields suppressed some of the risk-on sentiment, which is inevitable so. But I suspect Powell will err to the side of caution and yields will be lower after his semiannual testimony." Denis Vinokourov, head of research at the London-based prime brokerage Bequant, told CoinDesk. "In turn, [we're] expecting risk flows to resume and support upside in BTC and with it the rest of the market."
Stock markets came under pressure on Monday, as the U.S. 10-year bond yield reached a 10-month high of 1.39%, extending the year-to-date gain to over 35 basis points. The risk aversion likely helped drag bitcoin lower. According to CNBC, rising yields could be signaling reflation – an expansion in the level of output of an economy by using either fiscal or monetary policy or both. The Fed has been trying to reflate the economy since the March 2020 crash and has pumped trillions of dollars into the system to achieve that goal.
As such, one might now expect the Fed to raise rates earlier-than-expected. However, Powell made it clear last August that the central bank will hold interest rates low for some time after inflation has risen above its 2% target. Further, according to Margaret Yang, a strategist at DailyFX, investors are anticipating a large U.S. fiscal stimulus bill worth $1.9 trillion, which could boost the reflation theme and inflation outlook.
Put simply, the inflation-boosting stimulus is unlikely to be scaled back anytime soon and bitcoin's long-term bullish case remains intact. At press time, bitcoin is trading near $48,700, representing a 10.3% drop on the day.
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