Why bitcoin’s recent crash may be more than it seems

Why bitcoin’s recent crash may be more than it seems

Last year was a historic one for bitcoin. After a long battle engaging the US Securities and Exchange Commission and multiple institutional players in the United States, the financial watchdog finally approved the listing of 11 spot bitcoin exchange-traded funds (ETFs). It was a breakthrough for the crypto markets, ushering in a new era.

Led by key financial players like Grayscale, BlackRock, and Vanguard, the crypto ETF listing signalled the alarm for crypto holders. Bridging the gap between traditional investing and digital assets, the launch of the ETFs proved that cryptocurrencies are, in fact, an essential part of mainstream finance.

Much of bitcoin’s popularity draws from its unique potential to redefine money on a global scale. Although highly volatile, given its intrinsic growth aspect, which makes it increasingly more sensitive to economic events, bitcoin is still one of the most widely adopted cryptocurrencies.

Numerous factors contribute to bitcoin’s value. It can be transacted seamlessly across jurisdictions peer-to-peer, creating immense potential for a cryptocurrency value chain. This facilitates friction-free digital asset movement at a low cost, almost in real time.

This makes bitcoin available to anyone, anywhere globally, allowing more people to participate in the global financial system. Furthermore, given its decentralised nature, bitcoin is not subject to monetary policy changes and is only affected by them due to its correlation with tech stocks and the US dollar. Plus, it has a fixed supply of 21 million units in its code, which underpins its value.

Some analysts liken bitcoin to digital gold, and it recently grabbed the headlines with its steep price movements. President Donald Trump’s return to the White House earlier this year galvanised the world with his unprecedented measures. From punitive tariffs against Canada, Mexico, China, and the EU to deregulation measures aimed at boosting the crypto market, his policies propelled bitcoin above $100,000, a mark that no crypto had surpassed before.

Crypto bulls were eager to capitalise on the move, rushing to buy more, urged by the president’s pledge to create a crypto reserve. According to an account ordered by the White House crypto and AI czar David Sacks, this digital asset reserve currently amasses $200,000 in bitcoin alone.

However, though this might sound to bitcoin holders, it must be correlated with the bigger picture. Now that the US stance regarding tariffs and the Russia-Ukraine war has become clearer, the markets are bracing for a new world order and tighter economic measures going forward.

With US inflation still hovering above the Federal Reserve’s 2 per cent target and the shockwaves sent by Japanese exchange Mt. Gox’s debt settlements accounting for tens of thousands of US dollars worth of bitcoin released onto the market, bitcoin tanked below $80,000 overnight between March 10 and 11, amid a massive sell-off.

As of mid-April, bitcoin has seen a modest recovery, trading in the range of $84,000-85,000, amid signs of cooling inflation in the United States. According to newly released data, the consumer price index (CPI) declined by 0.1 per cent in March compared to the previous month, reflecting a clear weakening in price pressures.

Specifically, headline CPI rose 2.4 per cent on-year, down from 2.8 per cent in February, while core CPI eased to 2.8 per cent from 3.1 per cent. These are the lowest levels recorded in nearly four years, raising expectations that the US Fed may soon pivot towards a more accommodative monetary policy stance.

The cryptocurrency market responded positively to these developments, with speculative capital gradually returning. At the same time, signs of easing US-China trade tensions – including the US decision to waive tariffs on several tech-related imports – have helped improve investor sentiment.

Still, experts caution that the market continues to face a wide range of uncertainties, from geopolitical risks to the potential resurgence of inflation in the coming quarters. Could this mark the beginning of a new rally? The reality is likely far more complex.

Despite the crypto market’s jubilation over the tepid economic data, crypto investors should remain cautious about the future. Analysts suggest that the recent gains in bitcoin and other altcoins, including XRP, up 6 per cent, Dogecoin, up 4 per cent, and Cardano, up 2 per cent on March 12, may not be long-lasting.

On the one hand, the current US to-and-fro regarding tariffs on imported goods from China, Canada, and Mexico is only triggering further market jitters. Consequently, many Americans can only expect the prices of goods imported from these countries to rise in the near future.

On the other hand, the declination to overrule the possibility of an imminent recession in a Fox News interview further worried investors. Additionally, the eagerly anticipated US crypto policy changes a week prior also landed with somewhat of a jarring sound.

Instead of making new cryptocurrency purchases that would significantly boost digital asset prices, President Donald Trump announced that the government would use its current crypto holdings - most of which have been acquired through government seizures - to beef up its stockpiles.

That said, it might get worse before it gets better. Yet, not all is lost. Bitcoin and the broad crypto market are known for their volatility amid transition periods. Investors should also bear in mind the correlation between cryptoassets and the tech-heavy Nasdaq, which, in bitcoin’s case, may vary significantly from that of altcoins, which tend to be more closely correlated with the tech-driven index.

VIR