Bitcoin’s growth has slowed since mid-December, influenced by the Federal Reserve focusing on inflation. While the Core PCE inflation rate saw a slight rise to 2.8%, the bond market is responding to increased long-term U.S. yields, creating headwinds for Bitcoin. The cryptocurrency, which thrives on low interest rates, is currently in a profit-taking phase, with potential corrections projected. Investors have benefited from following Momentum, Capital’s investment strategies, despite the challenging market conditions.
Bitcoin’s Recent Performance and Economic Influences
The ascent of Bitcoin has noticeably decelerated since mid-December, a shift that coincides with the Federal Reserve’s latest meeting. According to Alexandre Baradez, the head of market research at IG France, “Recently, the Fed has redirected its focus towards inflation rather than employment. Although there was significant progress towards the 2% inflation target in early 2023 and 2024, leading to speculation about potential rate cuts, inflation has remained stagnant for six consecutive months.”
Current Inflation Trends and Their Impact on Bitcoin
The Core PCE inflation rate, which is the Fed’s primary gauge of inflation, dropped to 2.6% year-on-year in May 2024, but has since shown a slight rebound to 2.8%. While this figure is not alarming compared to the peak of 5.4% in 2022, inflation tends to be persistent. Baradez points out that many members of the Fed have noted the stagnation of inflation amidst a resilient U.S. economy, and uncertainty regarding future trade policies adds to the Fed’s cautious approach towards rate adjustments.
The elevated bond yield environment poses challenges for Bitcoin. The bond market has reacted sharply, with long-term U.S. rates seeing a significant increase. “The 10-year U.S. yield is now hovering around 4.8%, which is a considerable rise of 1.2 percentage points since mid-September, when the Fed began its rate-cutting journey. Following a robust employment report, market predictions now suggest only one rate cut by year-end, a stark contrast to the Fed’s prior expectations of more substantial cuts in 2025,” Baradez explains.
Bitcoin, often referred to as digital gold, does not generate yield and is influenced by the prevailing interest rates and monetary policies. “This was evident during the 2020-2021 period, where Bitcoin surged due to ample central bank liquidity and minimal bond rates. However, as central banks tightened their policies and raised rates sharply in 2022, Bitcoin and other cryptocurrencies saw a drastic decline,” the analyst adds.
The current atmosphere of high bond rates is therefore not favorable for Bitcoin, especially after its significant rally since September. Factors contributing to this surge include the Fed’s notable rate cut in September and market excitement surrounding potential political changes, as well as MicroStrategy CEO Michael Saylor’s push for companies to adopt Bitcoin into their balance sheets.
From a technical analysis standpoint, Bitcoin appears to be in a profit-taking phase after its recent gains. “Technically, Bitcoin has already retraced 23.6% of its upward movement from September to December. Given the Fed’s cautious stance on future rate cuts, this correction may extend to the next Fibonacci retracement level of 38.2% at $87,000, or potentially down to $80,500, which is a 50% Fibonacci retracement and aligns with a diagonal trend connecting two peaks from 2021,” the analyst warns.
Investors who follow Momentum, Capital’s investment newsletter, have seen substantial returns on their Bitcoin investments.