The Bitcoin price fell quite suddenly by $2,000 this afternoon from $66,500 to $64,500. What’s going on with the digital currency? Why is the price suddenly under so much pressure?
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Why has the Bitcoin price fallen?
Part of the answer is that Bitcoin is simply a volatile asset. These types of declines (and increases) are still the order of the day. But there is also a lot of uncertainty in the market at the moment and we will now go through that.
It has probably not escaped your attention that inflation in the United States is on the way up. This means that the US central bank may have to maintain its strict policy (high interest rates) for longer to put pressure on the market and the economy.
Higher interest rates simply mean that it is more expensive to raise capital, which means less money is in circulation. The aim is to slow down the economy so that inflation falls.
The market seems to be taking this a little more seriously at the moment.
In the graph above we see the prices of utilities (primary necessities) rising compared to the American S&P 500 stock index. Investors generally jump on utilities (including energy companies) as uncertainty increases in the world.
Why? Because people do not cut back on basic necessities when the economy is not doing well, while Bitcoin or Apple’s iPhones are not among those basic necessities. At least, not immediately.
It seems that the market wants to take some risk off the table and become a bit more defensive. Therefore, Bitcoin’s bull run may remain on hold for a while and we will have to be more patient.
Global liquidity is putting pressure on Bitcoin
Then there is global liquidity, the amount of capital available in the financial system for investment.
Normally the rule is: the more capital (the higher the global liquidity), the better it is for the prices of financial assets such as Bitcoin.
We are currently seeing global liquidity stagnating, partly due to the US tax season that reached its climax on April 15. Americans had to pay their taxes and therefore take money from the financial markets to meet their obligations.
In addition, we see that the Chinese central bank and the European central bank are currently not supporting global liquidity.
Personally, I expect it to pick up again from the second half of 2024. Partly because Western central banks will probably start lowering interest rates (if inflation allows this).
In the short term, things have been looking moderate/bad for Bitcoin for a number of weeks, but in the long term there does not appear to be any serious problems yet.
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