- Bitcoin tanks below $40,000.
- Rising inflation fuels demand for safe havens.
- Accelerated Fed hikes and tightening impact the Bitcoin price.
Cryptocurrencies are yet again under pressure as risk-off mode remains the central theme in the capital markets. Bitcoin is one of the coins under pressure plunging below the pivotal $40,000 a coin level. The recent sell-off has been fuelled by growing concerns about inflationary pressures and the long-term impact of the Russian invasion of Ukraine.
Bitcoin technical analysis
BTCUSD has struggled to find support above the $40,000 level dropping to three days lows of $39,253. With the flagship cryptocurrency stuck between two crucial levels and no sign of directional bias, a drop to the $35,000 handle could be in the cards in continuation of an emerging ascending channel shown below.
The pair needs to find support above the $35,000 mark as part of the ongoing rotation to avert the risk of plunging further. A sell-off followed by a close below the key level could accelerate a drop to the $29,100 level. On the flipside, BTCUSD finding support above the $35,000 level could reignite hopes of a correction back to the $40,000 psychological level.
Why is Bitcoin correcting lower?
Bitcoin’s move lower is being fueled by a number of factors, key among them being a report by the Labor Department that said inflation hit 7.9% in January, the highest level in 40 years. High inflation is fuelling concerns that the US Federal Reserve’s hands will be pushed into hiking interest rates and tightening monetary policy aggressively to try and cool off the economy.
The prospect of a 50-basis point rate hike is already fuelling dollar strength, all but piling pressure on BTCUSD. In addition, investors are increasingly turning their attention to assets that benefit from higher interest rates, such as bonds, all but shrugging riskier assets such as Bitcoin.
Cryptocurrencies often trade in tandem with riskier assets. With the stock market, especially high-growth stocks edging lower, BTCUSD was always going to be one of the casualties. Therefore, the flagship cryptocurrency is likely to weaken even further, heading into the big announcement by the FED next week.
High inflation is another tailwind that is taking a significant toll on Bitcoin sentiment in the market. The spike in commodity prices fuelled by higher oil prices means most people are seeing a shortage of funds that can be used to invest in riskier assets such as Bitcoin. High inflation has reduced investors’ spending power, with most people opting to focus on other parts of the economy.
Unlike in the past, Bitcoin is struggling to live up to expectations as a hedge against rising inflation levels. Most investors have resorted to safe-haven assets to hedge against inflation at the expense of the cryptocurrency. Gold and the US dollar have turned out to be the biggest beneficiary, attracting investment dollars from constitutional investors.
Gold has already powered to highs of $1983 an ounce as investors turn to it at the expense of Bitcoin. Bitcoin has in the recent past traded more like a growth stock rather than a hedge against inflation or as a safe haven away from centralized securities.
Final thoughts
Bitcoin’s long-term prospects are highly dependent on the kind of utility it can bring to the mainstream financial markets. Its ability to enable instant and low costs to cross-border transactions is one factor that supports a positive long-term outlook. More innovations being built on top of its blockchain will also significantly impact the native token.
President Joe Biden signing a new executive order to study digital assets in the US is another developing factor that could significantly impact BTC’s outlook. The US coming up with rules to define cryptocurrencies and their use is far more consequential.
