Investors looking for clues on bitcoin's recent failure despite continued accumulation by the Luna Foundation Guard (LFG) may want to look at the ever-growing list of macro risks and what's happening in traditional markets.
The world's largest cryptocurrency fell under $42,000 during European trading hours, hitting the lowest level since March 22 and extending the decline from the late March high of $48,240, according to CoinDesk data. The continued slide came even as LFG added $173 million in bitcoin to its wallet over the weekend, boosting its total holdings to almost 40,000 BTC.
The weakness perhaps stems from traditional investors refusing to follow LFG's lead, considering the several economic and political uncertainties stalking the risk assets, according to Noelle Acheson, head of market insights at Genesis Global Trading, which is owned by CoinDesk parent Digital Currency Group.
"The DXY strength is part of it, but overall it's more market uncertainty, macro concern and a focus on what rates will do," Acheson said in a Telegram chat.
The dollar index (DXY), which tracks the greenback's value against a basket of major currencies, tapped two-year highs above 100 early today, taking the year-to-date gain to 4.3%, according to data provided by charting platform TradingView. The global reserve currency has risen 1.5% this month.
According to Kevin Kelly, co-founder and global head of macro strategy at Delphi Digital, the greenback and bitcoin have a pretty inverse correlation. "2017 was one of the worst years for the dollar, and that coincided with a huge run in bitcoin," Kelly said in an analyst call in March. "We saw bitcoin run up in early 2021. That was on the back of the dollar weakness."
Griffin Ardern, volatility trader from crypto asset management firm Blofin, said, "when the DXY has reached highs and climbed further, it usually indicates further declines in other assets, whether it is the stock market, cryptocurrencies or FX."
That's true even more so now given the ongoing dollar rally is being fueled by hawkish Federal Reserve officials, calling for a faster pace of interest rate increases and balance sheet runoff to curb rapid inflation. Policy tightening is considered bearish for risk assets, including bitcoin.
According to a Reuters poll, the Fed will likely raise rates by 50 basis points during the May and June meetings, having raised borrowing costs by 25 basis points last month. The U.S. 10-year Treasury yield has risen to a two-year high of 2.7%.
The cryptocurrency's sensitivity to equity markets is also a cause for concern. Big tech is suffering as the liquidity available to allocate to high-growth sectors is dwindling with markets pricing faster tightening by the Fed. "We also have increasingly frequent reports of tech company shutdowns, layoffs and/or dwindling term sheets," Acheson noted.
Therefore, tech stocks may be in for a significant correction, as predicted by Arthur Hayes, co-founder and former CEO of crypto spot and derivatives exchange BitMEX.
Besides, inflation is getting entrenched worldwide with the ongoing Russia-Ukraine war, leaving a virtually zero probability of central banks resorting to liquidity-pumping policies anytime soon.
If all this is not enough, the odds of far-right candidate and European Union-skeptic Marine Le Pen's victory in France's presidential elections may keep markets on tenterhooks.
European stock futures dropped early today after polls showed French President Emmanuel Macron and nationalist rival Le Pen were the top two vote-getters in Sunday's first round, with 27% and 24%, respectively. Macron's narrow lead has some investors worried that Le Pen would be able to close the gap by consolidating the anti-Macron votes before the April 24 final round.
"Adding to the impact of the war in Europe, we have the results of the voting yesterday in France, which could – depending on how the next round goes on April 24 – bring even more currency turmoil," Acheson added.
"And with so much uncertainty and nervousness, especially given crypto assets' historical volatility, macro investors are choosing to wait on the sidelines until there are enough signals to take directional bets with some conviction," Noelle added.
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