Bitcoin closed below $29,000 for the first time in 56 days on August 16. As the likely cause, analysts immediately pointed to this week’s FOMC minutes, which expressed concerns about inflation and the need to raise interest rates.
Despite the immediate causes of the decline, Friday’s expiration of Bitcoin options worth $580 million has favored bear traders. On August 18, they could potentially make a profit of $140 million, adding to the downward pressure on Bitcoin and complicating BTC’s search for a bottom.
Bitcoin hits a 2-month low
Bitcoin reached a nearly two-month low as risk aversion weighs on the crypto market, and global government bond yields reached their highest level in approximately 15 years.
The largest digital asset by market value dropped as much as 3.7% to $27,867, extending its losses after falling below $28,000. The intraday decline was the most significant since July 24. Ether was down approximately 4%, while Cardano and Solana’s tokens reversed earlier gains to fall.
The rise in global yields is a result of robust economic data that challenges the notion that central bank rates have reached their zenith. In general, higher interest rates diminish the allure of alternative investments such as cryptocurrencies.
The decline in Bitcoin follows months in which the crypto traded within a confined range. This week, according to data compiled by Bloomberg, the 90-day volatility of the original crypto reached its lowest level since 2022 for the first time since the beginning of the year.
Earlier in the week, there was optimism that a resolution to the Grayscale Bitcoin ETF would be reached this week, but nothing came out. In addition, traditional markets have been sluggish all week, with the SPX and technology sectors declining, 10-year interest rates rising and the dollar gaining strength, and China’s credit and economic data deteriorating, all of which are negative for risk assets.
What is happening with investors?
Crypto is renowned for its erratic price fluctuations, which can transform a $1,000 investment into $10,000 within a day or even hours. For many investors, this volatility was part of the allure.
Since June, and some would contend since March, Bitcoin has been a bit boring. The crypto, which accounts for just under half of the market, has been stagnant at around $30,000 for months.
The number of Bitcoins held by short-term investors is at a multi-year low. However, according to a report by Glassnode, some long-term investors continue to purchase the crypto, which could be viewed as a positive.
The imminent judgment on Grayscale’s lawsuit against the Securities and Exchange Commission over whether it should be allowed to create a spot Bitcoin ETF may also be positive for cryptocurrencies.
Any ruling in favor of Grayscale has the potential to supercharge crypto prices, as it would give investors a new way to invest in the most popular cryptocurrency in the world.
Grayscale, for its part, appears optimistic. The company tweeted a link to a vacant position in its ETF department on Thursday.
Bitcoin’s decline? Is there salvation in sight?
The decline continued a downturn that began earlier in the week and mirrored Wall Street’s risk aversion. The formerly red-hot averages of the stock market have been falling in August, with interest rate fears, banking sector worries, and anxiety serving as the primary reasons to sell.
The downward volatility in BTC comes days after the U.S. Commodity and Futures Trading Commission’s (CFTC) Commitment of Traders (COT) report revealed leveraged funds – hedge funds and commodity trading advisors – increased bearish bets in the CME-listed cash-settled bitcoin futures during the week ending August 8.
Notably, Bitcoin had already dropped to $29,000, its lowest level in nine days, before the Fed minutes were released. Given that the 10-year yield had been rising, indicating skepticism about the Fed’s ability to control inflation, the impact of the minutes was minimal.
In addition, on August 17, S&P 500 index futures declined by only 0.6% from their August 16 pre-event level. During the same period, WTI crude oil rose 1.7%, whereas gold fell 0.2%.
Concerns regarding the economy of China may have also contributed to the decline. The nation reported slower-than-anticipated growth in retail sales and fixed asset investment, which could affect the demand for cryptocurrencies.
Given the growing concern among investors about an impending economic downturn as a result of actions taken by central banks to control inflation, it is probable that Bitcoin bears will continue to hold the upper hand.
This trend is not limited to the upcoming Friday’s expiration and is anticipated to continue, as the BTC bulls’ primary short-term objective — the approval of a spot ETF — has slim chances of being achieved.
Consequently, those who are bullish are in a difficult position. The success of their call (purchase) options depends on Bitcoin’s price at expiration exceeding $28,500. The most probable scenario, in which bears could achieve a favorable outcome of $140 million, suggests the possibility of a further Bitcoin price correction.
