Bitcoin price weakness results from larger macroeconomic concerns


Bitcoin (BTC) price traded below $39,000 for the first time in over 50 days on Jan. 23. The downward movement initiated on Jan. 11, coinciding with the U.S. Securities and Exchange Commission (SEC) approval of the spot Bitcoin ETF. The 17.5% correction in the 12 days leading to Jan. 23 triggered an aggregate $385 million liquidation in long (buy) futures BTC contracts.

The U.S. economy now favors the stock market relative to Bitcoin

From a macroeconomic perspective, 2024 marked a reversion in the DXY index which measures the strength of the U.S. dollar against a basket of foreign currencies, including the euro, the British pound, and the Japanese Yen. After trading at 100.80 on Dec. 28, 2023—its lowest level in more than 5 months—the U.S. dollar gained momentum, and the index currently hovers near 103.75. This movement suggests that investors believe that despite fiscal problems, the odds still favor the U.S. currency—at least in relative terms.

Bitcoin/USD price index (right) vs. DXY index (left). Source: TradingView

Analysts and economists are now pricing higher odds for the U.S. Federal Reserve’s (Fed) successful strategy to curb inflation without causing an economic contraction. The 1-year expectation for the U.S. moved down to 2.43% in January 2024, down from 3.09% in December 2023. Meanwhile, a recession seems out of the radar as the Conference Board “Economic Forecast” expects a 1.7% growth outcome for the U.S. gross domestic product in the first quarter, followed by a 2.4% growth in the second quarter.

As per the FedWatch Tool from CME Group, the likelihood of an interest rate cut in March dropped to 47% from 81% in the previous week. Additionally, investors now anticipate only 5 rate cuts throughout 2024, as opposed to the previous estimate of 6. New York Fed President John Williams and Atlanta Fed President Raphael Bostic conveyed that they are in no hurry to cut interest rates, even if there are no more hikes under discussion, as reported by CNBC.

One could argue that the S&P 500 index is currently near its all-time high; thus, the external factors impacting risk-on assets should also be beneficial for Bitcoin. However, the drivers for the stock market completely differ from commodities, including cryptocurrencies. For starters, the 500 largest U.S. listed companies hoard a combined $2.6 trillion in cash positions, besides some of them generating dividends, so in a way, the sector acts as a safe haven in case of a mild recession.

Bitcoin’s price reflects spot ETF outflows and heightened regulatory pressure

Apart from being perceived as a risk-on asset, Bitcoin has faced problems of its own, including a net aggregate spot exchange-traded fund (ETF) outflow since Jan. 17.

In a post on the X social network, user Capital15C reported that the total number of Bitcoin held by U.S. listed ETFs dropped to 645,054 on Jan. 22. While the $183 million outflow in 3 business days might seem small in absolute terms, it contradicts investors’ expectations following the spot ETF launch.

Related: Spot Bitcoin ETFs’ on-chain addresses found by Arkham

Another source of concern for Bitcoin investors seems to be the bankruptcy estate from the now-defunct Mt. Gox exchange, which is expected to unlock some 142,000 BTC. Some initial payments occurred in December 2023, but the trustee is expected to pay off the creditors by October 2024. Lastly, one should not discard the negative regulatory pressure, especially in the U.S., which might not hold direct significance to Bitcoin but potentially impacts stablecoins and exchanges.

On Jan. 21 post, U.S. Senator Elizabeth Warren’s post cited a report claiming that “rogue nations are using crypto to dodge sanctions and undermine our national security.” While the cryptocurrency community rushed to explain that “fiat is the preferred currency for financial crimes,” which happens to be true but does not diminish the potential negative outcome from regulatory actions and its subsequent impact on short-term prices.