Bitcoin neared the $47,000 level in mid-March in a run that lasted a couple of weeks after a fall to $37,000 from November’s lifetime highs of nearly $69,000. The asset has since slid every week and could fall to as low as $20,000 if current market conditions continue.
Bitcoin, the world’s largest cryptocurrency by market capitalization, has been long positioned as a hedge against inflation, or an investment that is supposed to protect against the decreased purchasing power of currencies or other assets.
That has failed to happen so far, however, as bitcoin is highly correlated with global markets and has traded similar to a risky technology stocks in the past few months. Meanwhile, some analysts say investors are selling bitcoin as it advances.
"In our view, the trend of selling cryptocurrency on upside movements remains. Adding to the downside is the bleak outlook for U.S. monetary policy, where no light at the end of the tunnel with rate hikes can be seen yet," FxPro market analyst Alex Kuptsikevich wrote in an email.
"We expect the bears not to loosen their grip in the coming weeks. In our opinion, a turnaround in sentiment may not come until the approach of the 2018 highs area near $19,600," Kuptsikevich added.
Inflation concerns affect bitcoin prices
Inflation concerns have contributed to bitcoin’s fall in the past several weeks. Earlier this month, the U.S. Federal Reserve hiked rates by the largest amount since 2000 as it seeks to tighten monetary policy following $2 trillion in stimulus in the past few years.
In April, Goldman Sachs analysts said in a note that the Fed's aggressive measures to control inflation could result in a recession. The investment bank put the odds of an economic contraction – a phase of the business cycle in which the economy as a whole is in decline – at about 35% over the next two years.
Former Goldman Sachs CEO Lloyd Blankfein reiterated that sentiment over the weekend, stating the U.S. economy was at a “very, very high risk.” Such an environment could cause a drawdown in U.S. equities, which may spread to bitcoin and cause further sell-offs in the coming weeks if the current correlation continues.
The risks of a sell-off could already be starting to show. Last week, the $18.3 billion Grayscale Bitcoin Trust (GBTC), the world's largest bitcoin fund, saw its market discount widen to an all-time low of 30.79%, as reported. The discount could be taken as a bearish indicator because it might mean a waning interest in bitcoin among traders. Grayscale and CoinDesk are both owned by Digital Currency Group.
GBTC is one of the only ways for traders in the U.S. to gain exposure to the price movements of bitcoin without the need to purchase the actual cryptocurrency.
Bitcoin was hovering under the pivotal support level of $30,000 at the time of this writing, CoinGecko data shows.
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