Bitcoin‘s current price struggles are no secret to the cryptocurrency sector as the top asset continues to bleed red almost 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 settled in.
Much of the downtrend has been triggered by renewed fears of tapering from the Federal Reserve, which has been reeling with record-high inflation in the United States. In a report by IntoTheBlock, analyst Lucas Outumuro opined that the possibility of a decrease in the dollar’s monetary supply through quantitative tightening could spell disaster for the asset.
An inflation of fear
This is because Bitcoin’s limited supply positioned it as a hedge against inflation, which largely contributed to its recent rise in popularity amid rising inflation. The Fed eased its hawkishness in 2021 following the lockdown-induced economic slowdown and stimulus packages aided investors in allocating to Bitcoin.
However, as fears of inflation continue to rise, a reversal on the same is expected.
Outumuro pointed out in his report that a similar trend was noticed in Bitcoin’s price movement in 2018 when inflationary pressures and monetary supply decreased.
This correlation between the monetary supply change and Bitcoin’s price has been increasing since then, recorded at a high level of 0.77 in the report.
Source: IntoTheBlock
If the monetary supply decreases going forward, as has been recently indicated by the Fed, Bitcoin’s future outlook could turn increasingly bearish. This is because investors would once more shift focus from risky assets like crypto and equities.
Out flow the bulls
This has already been seen playing out in Bitcoin’s trade statistics, as the crypto-asset registered outflows in four out of the five past weeks, totalling over $317 million. Total AUM in Bitcoin also hit a 3-month low of $35 billion last week, according to Coinshares.
These sell-offs have inadvertently caused the asset’s price to crash almost 40% from its all-time high in November. However, experts have warned that macro factors are bound to aid the downtrend’s continuation.
Analyst Alex Kruger highlighted the same on Twitter recently,
13/ Furthermore, bitcoin is now a macro asset that trades as a proxy for liquidity conditions.
As liquidity diminishes, macro players now in the fray sell bitcoin, an all of crypto follows
(crypto correlations with bitcoin dropping anytime soon are a pipedream)
— Alex Krüger (@krugermacro) January 9, 2022
The slowdown of the stock market could be another indicator that the bears are on the winning side. Especially since its rising correlation with Bitcoin is already worrying experts.
The International Monetary Fund had sounded alarms for the same recently, arguing that the spillover could cause stability concerns across financial markets.
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