Bitcoin extended Tuesday's decline even as gold, a traditional inflation hedge, remained resilient to increased bets that the U.S. Federal Reserve will tighten its monetary policy sooner than previously expected.
The leading cryptocurrency was trading near $32,300 at press time, a 1.4% drop on the day. Prices hit a 2 1/2-week low of $31,669 early today, having run into offers above $33,000 on Tuesday, CoinDesk 20 data show.
The drop to the lowest level since June 26 comes a day after futures tied to the federal funds rate and eurodollars, which track short-term interest-rate expectations, raised bets on Tuesday that the Fed would increase interest rates between December 2022 and the first quarter of 2023. According to Reuters, the repricing happened after the U.S. Labor Department said the consumer price index increased 5.4% year-over-year in June, the fastest pace since 2008.
Rate hikes, or possible tapering as signaled by Federal Reserve Bank of St. Louis President James Bullard, boost the attractiveness of holding fiat currencies, in this case the dollar, and dilute the appeal of perceived store-of-value assets such as bitcoin and gold.
However, while bitcoin is nursing losses, gold is trading 0.35% higher on the day at $1,814 an ounce. The discrepancy spurred Amber Group, a crypto services provider, to call for caution in reading too much into the rate-hike narrative for the time being.
"Bitcoin's weakness this morning could be associated with the Fed rate-hike fears," Amber Group said. "However, it's hard to force this rate-hike narrative as a headwind if other risk assets (stocks) are hitting new highs and gold remains bid."
Trader and analyst Alex Kruger said the cryptocurrency has been looking heavy for a long time, courtesy of weak flows, and "the CPI may have helped."
That said, some analysts say concerns over tightening or gradual unwinding of stimulus may not be a threat to traditional markets, but present immediate downside risk to bitcoin.
"Is tapering a real concern? Not for broad markets, but arguably it is a risk for bitcoin, considered by fiat-based institutional investors at the extreme end of the risk spectrum," Messari's Mira Christanto said in a blog post dated May 27. "Capital to this new asset class is still mercenary and tends to over-react on the bull and bear side."
The mid-May sell-off from $58,000 to $30,000 occurred after a reported surge in U.S. inflation in April increased concerns that the Fed may consider an early rate increase or reduction of liquidity-boosting asset purchases, known as quantitative easing.
Stack Funds Chief Operations Officer Matthew Dibb said, "The recent increase in Fed rate-hike bets may not bode well for BTC in the short term, as the recent correlation is more tied to equities, liquidity and retail sentiment, rather than BTC being a 'hedge' to inflation."
Dibb said the cryptocurrency has been looking weak on technical charts for the past few weeks, and the latest U.S. CPI release may add to the selling pressure.
However, while bitcoin has come under pressure this week, it is still locked in the broad two-month range of $30,000 to $40,000. "It's hard to read too much into the price action currently while we're still stuck in this range," Amber Group said.
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