Cryptocurrencies

Bitcoin (BTC) last closed above $68,000 on April 11, despite trading

Bitcoin (BTC) last closed above $68,000 on April 11, despite trading above $67,000 several times in the past five days. Even with Bitcoin rising 2% on May 20, another 7% move is needed to reach its all-time high. Meanwhile, gold reached a record high of $2,450 on May 20, and the S&P 500 rose to an all-time high of 5,325 points. This backdrop has left BTC investors pondering the factors restricting its advance.

Bitcoin has anticipated the US monetary expansion, rising 51% year to date

Bitcoin’s 51% year-to-date gain arguably reflects investors’ expectations of monetary expansion that has benefited other assets recently. With the US Federal Reserve needing to inject liquidity – either to support the faltering banking sector or to stimulate the economy – investors often turn to scarce assets for protection. This tendency intensifies if there is an increased probability of an economic recession.

USA Wider M2 Monetary Base, US$1 billion. Source: Federal Reserve Bank

According to US Federal Reserve data, the broader US monetary base (M2), which had been stagnant at $20.8 trillion since May 2023, exceeded $21.0 trillion in April 2024. This shift marks the end of the contraction period that began in April 2022 when the M2 index rose. It reached 22 trillion dollars. Regardless of interest rate trends, an increase in money in circulation indicates rising inflationary pressures, even if companies and individuals are currently reluctant to spend.

However, it would be simplistic to assume that the US government will continue to add liquidity if inflation remains a major public concern. For example, the US Federal Reserve may choose to lower interest rates while taking steps to constrain the economy, such as increasing banks’ reserve requirements. This strategy could slow the expansion of the M2 monetary base in the hope of achieving a “soft landing,” which aims to avoid a recession following a period of high interest rates.

Weakness in the global real estate sector affects investors’ expectations

There are several factors that affect the price of Bitcoin, including some external to the cryptocurrency market and others related to Bitcoin trading dynamics and momentum. For example, on May 17 Chinese authorities announced plans to address the region’s troubled real estate market. This decision highlights the risks of economic downturn, given the fragile conditions the sector is experiencing.

The People’s Bank of China (PBOC) will provide $42.2 billion to state-owned enterprises to buy unsold apartments. Larry Hu, Macquarie’s chief China economist, reportedly told CNBC that resources provided by local governments “may be too limited to move the compass at the macro level.” He also noted that “later, we may see more efforts from the central government.” Hence, investors remain skeptical that this one-time intervention by the central bank will solve the problem.

The risk of an economic crisis stemming from the real estate sector extends beyond China, as Barry Sternlicht, CEO of Starwood Capital Group, noted on May 15. According to Yahoo Finance, Sternlicht stated that “commercial real estate is facing a balance sheet crisis” and added that “borrowers will have difficulty refinancing debt due to rising interest rates.” He also reportedly predicted that regional and community banks in North America would likely begin to fail.

Limited Bitcoin Adoption and Pressure from Grayscale Holdings

From one point of view, the increased risk of economic recession can be considered beneficial for Bitcoin, as this cryptocurrency was specifically designed to function as an independent financial system. However, it is important to acknowledge that Bitcoin is still not mainstream, especially as a closed-loop economic system or medium of exchange. For this reason, when investors are looking for a hedge, they rarely look at Bitcoin as a fundamental option, but instead look at it as a risky asset.

On May 20, Grayscale CEO Michael Sonnenshein announced his resignation after a decade with the company. Grayscale manages the GBTC spot exchange-traded fund (ETF). Its parent company, Digital Currency Group (DCG), was significantly affected by the bankruptcy of cryptocurrency lending and trading company, Genesis, in January 2023. As a result, investors are concerned that part of the $19.4 billion GBTC fund may be liquidated. Which may negatively affect the price of Bitcoin.

This article does not contain investment advice or recommendations. Every investment and trading move involves risks, and readers should conduct their own research when making a decision.

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