4 - 7 minute read
Bitcoin (BTC) experienced a significant drop in the week ended April 23 as bond yields increased, and the U.S. dollar liquidity declined. The leading cryptocurrency by market value fell by 9% to $27,600, registering its largest single-week percentage loss since early November. The yield on the 10-year U.S. Treasury note rose by six basis points (bps) to 3.58%, its second straight weekly gain, denting the appeal of risk assets, including cryptocurrencies.
The USD Liquidity Conditions Index, an indicator tracking the greenback’s supply in the monetary system, slipped to $6.13 trillion, reaching the lowest in over a month. Besides, traders priced in a higher probability of the Federal Reserve (Fed) continuing its tightening cycle with a 25 basis point rate hike in May.
Since 2021, bitcoin and the wider crypto market have closely tracked local peaks and troughs in the dollar liquidity index. Bitcoin rose to its then-high of $28,000 in the first half of March as the Federal Reserve (Fed) opened liquidity taps to contain the banking crisis, pushing the dollar liquidity index higher from $5.82 trillion to $6.35 trillion.
“In the absence of encouraging signs on the monetary liquidity front, BTC continued to drift down over the week after its sharp drop on Monday, dragging other large-cap crypto assets with it,” said Noelle Acheson, the author of popular Crypto Is Macro Now newsletter.
According to Dessislava Laneva, macro analyst at Paris-based crypto data provider Kaiko, bitcoin and financial markets, in general, may see increased price turbulence in the near term, thanks to the U.S. debt ceiling issue. The U.S. government reached its statutory debt limit, the self-imposed cap on borrowing, of $31.4 trillion in January, forcing the Treasury to implement extraordinary measures to help the government meet its obligations for at least five months. These measures also boosted the dollar liquidity and kept risk assets bid.
Since then, the debt ceiling negotiations have been in a deadlock. Last week, one-year credit default swaps, which measure the cost of insuring against government default in the next 12 months, rose to a record high, according to Wall Street Journal.
The cost of insuring U.S. debt for one year via CDS has soared to the **highest on record** as the debt-ceiling debate has heated uphttps://t.co/jtCzQoFRvE @JoshZumbrun pic.twitter.com/ErTS57Qge0
— Gunjan Banerji (@GunjanJS) April 21, 2023
Observers are worried the Treasury may run out of money in June. Bitcoin is still seen as a risk asset and may face selling pressure if equities throw a fit at some point. Risk assets took a beating during the 2011 debt ceiling drama when a deadlock in Washington led to the country losing its top-notch triple-A sovereign credit rating.
Once a deal is reached, expected in the second half of the year, the Treasury will need to refill its reserves, thereby reducing liquidity and exacerbating the impact of quantitative tightening. This situation may prompt the Fed to cut rates, which would ultimately benefit risk assets.
According to Tom Dunleavy, macro analyst at Messari, a potential default might see bitcoin pick up a haven bid like it did during the recent banking crisis in March. “If the U.S. does default or we get close to the deadline without a deal, it should be immensely positive for BTC. We’ve seen the store of value story for BTC become more solidified with the recent bank failures. BTC’s correlation to gold is also near all-time highs,” Dunleavy added.
The Bottom Line
Bitcoin’s value has been declining due to the rising bond yields and the declining U.S. dollar liquidity. Traders priced in a higher probability of the Fed continuing its tightening cycle with a 25 basis point rate hike in May. Bitcoin is still seen as a risk asset and may face selling pressure if equities throw a fit at some point. However, a potential default might see bitcoin pick up a haven bid like it did during the recent banking crisis in March. Traders should keep an eye on the U.S. debt ceiling negotiations and the dollar liquidity index to make informed trading decisions.
