More pain likely, says market expert after Bitcoin’s 8% price loss

Bitwise’s head of research in Europe, who has been clearly bullish on bitcoin (BTC) for months, has turned cautious after last week’s 8% drop, warning of deeper losses in the coming weeks.

Bitcoin, the leading cryptocurrency by market value, fell 8.8% to nearly $95,000 last week, the biggest percentage drop since August, according to data source TradingView and CoinDesk Indices. The losses came as the Federal Reserve signaled fewer rate cuts for next year and emphasized that it prohibited holding BTC and is not seeking a change in the law to do so.

The so-called aggressive rate projections also roiled sentiment in traditional markets, leading to a 2% drop in the S&P 500 and a 0.8% gain in the dollar index, lifting it to the highest level since October 2022. The 10-year bond yield Treasury bonds, the so-called risk-free rate, rose 14 basis points, bullishly breaking a technical pattern.

Risk aversion may persist for some time, according to Andre Dragosch, director and head of European research at Bitwise.

“The overall macroeconomic picture is that the Federal Reserve is caught between a rock and a hard place, as financial conditions have continued to tighten despite three consecutive rate cuts since September. Meanwhile, real-time measures of US inflation Consumer prices have accelerated again in the past few months to new highs also judging by the truflation indicator for US inflation,” Dragosch told CoinDesk.

Dragosch is one of the few observers who correctly predicted a massive BTC price rally in late July, when sentiment was not bullish. BTC hit lows near $50,000 around that time and recently surpassed $100,000 for the first time on record.

“Therefore, it is very likely that we will see more problems in the coming weeks, but this could be an interesting buying opportunity given the continued tailwinds provided by the BTC supply shortfall,” Dragosch added.

Hardening Treasury yields, representing higher borrowing costs and the relative attractiveness of fixed income investments, typically leads to a capital outflow from riskier assets such as cryptocurrencies and stocks. A stronger dollar also makes dollar-denominated assets more expensive, discouraging capital inflows.

Is inflation following the model of the 70s?

If you’ve been following the financial markets for any amount of time, you’ve probably come across discussions that price pressures in the U.S. economy are on the same inflation rollercoaster as they were in the 1970s. Back then, the second wave was more intense than the first.

Dragosch notes that stiff CPI inflation readings in recent months have raised concerns at the Federal Reserve about a possible second wave, leading to a more cautious stance on rate cuts.

“They are probably afraid of the double hump scenario and a revival of the inflation peak of the 1970s, so they are probably too reluctant to cut rates more aggressively,” Dragosch said. “They risk a significant acceleration in inflation if they cut rates aggressively; if they do little, the economy may suffer.”

However, over time, the financial squeeze caused by rising yields and the dollar index would force the Federal Reserve to take action, Dragosch added, highlighting the tight supply of BTC as a major long-term bullish factor.