Bitcoin’s current price struggles are no secret for the crypto sector as the top asset continues to be in the red for nearly three weeks into the new year. It has lost 11% of its valuation over the past month, leading many experts to believe that the bears have stabilized.
Much of the downtrend was triggered by renewed concerns about cuts from the Federal Reserve, which is reeling from record-high inflation in the United States. In a report by IntoTheBlock, analyst Lucas Outumuro suggested that the dollar’s ability to reduce the money supply through quantitative tightening could spell disaster for the asset.
Inflation of fear
This is because Bitcoin’s limited supply has positioned it as a hedge against inflation, which has largely contributed to its recent rise amid rising inflation. The Fed has eased its hawkish stance in 2021 after the economy decelerating due to lockdowns and stimulus packages aided investors to allocate to Bitcoin.
However, due to concerns that inflation will continue to increase, this may be reversed.
Source: IntoTheBlock
Outumuro pointed out in his report that a similar trend was noticed in Bitcoin’s price movement in 2018 as inflationary pressures and the money supply decreased.
The correlation between the change in currency supply and the Bitcoin price has been growing since then, recording a high of 0.77 in the report.
Source: IntoTheBlock
If the money supply decreases in the future, as recently pointed out by the Fed, the future outlook for Bitcoin could be increasingly bearish. This is because investors will once again shift their focus away from risky assets like cryptocurrencies and stocks.
Flow of bulls
This is already evident in Bitcoin’s trade statistics, as the crypto asset has registered outflows in four of the past five weeks, totaling more than $317 million. Total AUM in Bitcoin also hit a 3-month low of $35 billion last week, according to the Common Currency.
These sell-offs have inadvertently sent asset prices down nearly 40% from their November all-time high. However, experts have warned that macro factors are sure to support the rally. continuation of the downtrend.
Analyst Alex Kruger highlighted the same thing on Twitter recently,
13/ Furthermore, bitcoin is now a macro asset that is traded as a proxy for liquidity conditions.
As liquidity drops, macro players are now in a competition to sell bitcoin, all crypto follows
(cryptocurrency correlation with bitcoin falling anytime soon will be a pipe)
– Alex Krüger (@krugermacro) January 9, 2022
The stock market deceleration could be another indicator that the bears are on the winning side. Especially because of its growing correlation with Bitcoin has experts worried.
The International Monetary Fund recently issued similar warnings, saying that spillovers could raise concerns about stability in financial markets.