Bitcoin Falls as Bond Yields Keep Rising

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As bond yields continued to rise, bitcoin broke the $40,000 support level early Monday amid a selloff in crypto and tech stocks.

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According to FactSet, bitcoin, the largest cryptocurrency by market cap, fell to $39,558, before then rebounding to around $41,720. ether,
According to CoinMarketCap, the second largest cryptocurrency also fell below the $3,000 technical support, touching a low of $2,948, before dropping back to around $3,090.

While bitcoin and ether were both down about 2% in Monday’s trading, other cryptos were facing worse: Solana was down 4.8%, Binance Coin, down 2.8% and Cardano.,
down 3.6%.

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Crypto appeared to fall in tandem with other rate-sensitive assets, especially tech stocks. The tech-heavy Nasdaq Composite Index was down 2.3%. The 10-year Treasury yield rose another 3.8 basis points, or one-hundredth of a percentage point, to 1.81%.

Crypto-related stocks were also falling hard on Monday, with Coinbase Global (ticker: COIN) falling 7% to $217. And the Amplify Transformational Data Exchange-Traded Fund (BLOK), a basket of crypto-related stocks, was down 4%.

Bitcoin is now down 12% in 2022. And it is becoming clear that bitcoin and other cryptos are trading like sectors that do not perform well in a rising rate environment.

“The bitcoin/10-year yield correlation has completely settled this week,” Nomura Instinet said in a note on Monday morning. Data show, bitcoin, was closely tied to the 10-year yield since August 2021 – as yields rose, so did the price of bitcoin.

But this correlation has flipped so far in 2022. The 10-year yield jumped to 1.76% on January 10. From 1.55% on January 3. This coincided with bitcoin falling from $46,500 to $40,000, a 14% drop.

Bond yields are rising on expectations of very tight monetary policies in 2022 as the Federal Reserve and other central banks raise interest rates to try to slow rising inflation. Goldman Sachs now expects the Fed to raise rates four times this year, exceeding prior expectations of three hikes. The Fed has indicated it may even begin shrinking its $9 trillion balance sheet.

The measures are likely to drain excess liquidity from financial markets, which the Fed and other central banks had supplied during the pandemic to help prop up the global economy.

Of course, bitcoin has long been heralded as “digital gold” – a store of value that must guard against high inflation and declining purchasing power from fiat currencies.

But as yields rise, bitcoin appears to be failing its store-of-value test. Furthermore, if yields continue to rise, further declines may occur.

“Bitcoin has been misclassified as an inflation hedge,” says Spencer Lerner, head of multiset solutions at Harbor Capital Advisors. “My view is that bitcoin makes the most of more liquidity.”

He argues that bitcoin benefited from the Fed’s easy-money policies. Lower rates and excess liquidity further fueled rising prices of assets on the risk-spectrum. Now that the Fed plans to tighten, capital is moving back into safe zones, putting pressure on high-growth tech stocks and crypto.

“The opportunity cost of holding high-multiple stocks increases as the Fed drains liquidity,” Lerner says. “It happens at the same time when inflation is high. But it confuses people to think that digital assets are an inflation hedge. It’s the opposite – crypto assets fall in value, with high inflation and liquidity withdrawals.”

Other analysts also see an inverse relationship between crypto and tighter monetary conditions.

“Despite the crypto market being in oversold territory, it is largely influenced by global markets and economic conditions,” said Marcus Sotirio, analyst at digital asset broker GlobalBlocks, in a commentary. “The plan by the Federal Reserve to hike rates in 2022, as well as reduce the monthly bond purchase rate, have contributed to the selling of bitcoin so far.”

Crypto bulls argue that bitcoin will eventually settle down and then rally. Galaxy Digital CEO Mike Novogratz Said on CNBC last week That he expects the price to drop to around $38,000 to $40,000: “We see a lot of institutional demand. I’m not nervous in the medium term.”

Nevertheless, bitcoin is now down more than 40% from its high of $68,900 last November. If this isn’t a painful bear market, it’s hard to say what it is.

Write to Darren Fonda at [email protected]


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