Sentiment and inflation: Factors putting pressure on Bitcoin price

Subsequently, there are fears that Bitcoin prices will take longer to recover.

Bitcoin (BTC) has been hovering around the $20,000 range for several weeks now after the coin lost over 60% of its value from its peak in November. The recent plunge wiped out over $600 million from its market cap and caused rising concerns of a bubble burst.

Negative investor sentiment

Cryptocurrency investors have been on edge since Bitcoin’s fall to around $20,000. Many of them fear that more unprecedented selloffs by key players could precipitate a bigger downtrend.

Further declines are likely to amplify losses and make it harder for the market to recover in the medium term. As such, many investors are holding off additional investments.

Besides the fall of cryptocurrencies, the decimation of linchpin crypto firms such as Three Arrows Capital (3AC) and the Celsius Network has also had a negative effect on investor sentiment.

The Singapore-based 3AC hedge fund, for example, collapsed with about $10 billion in investor funds.

The recent crypto crash threw the agency into financial turmoil and made it hard for it to repay its creditors and investors.

The Celsius crypto lending network, which was also revered in crypto circles, also fell on hard times when the crypto market dropped. The company was forced to halt payments to creditors and customers due to low liquidity.

Such incidences have upset investor confidence in the industry and reduced capital inflows needed to buttress cryptocurrencies such as Bitcoin.

Margin calls and liquidations

Liquidation occurs when an asset broker forcefully closes an investor’s collateralized position due to a loss affecting the initial margin.

Liquidations usually amplify market slumps by inadvertently increasing the number of selloffs.

On Jan. 11, for example, BTC futures contracts worth approximately $2.7 billion were liquidated within 24 hours, causing prices to retrogress from about $41,000 to sub $32,000 levels.

A similar occurrence happened on June 14 and caused Bitcoin prices to plummet by about 15%. About $532 million worth of Bitcoin was liquidated as a result.

While liquidations influence prices in the short term, they negatively impact asset prices by increasing market turbulence, which causes uncertainty. Uncertainty is bad for the business because it extends fear cycles.

Inflation

Inflation refers to the reduction in relative purchasing power using a nation’s base currency. High inflation usually leads to an increase in commodity and service prices and is typically characterized by unchanging income rates. During the month of May, the United States Consumer Price Index reached 8.3%. For comparison, it was 0.3% in April 2020 when COVID-19 lockdowns started.

Many analysts theorize that the high inflation rate was brought on by the aggressive fiscal policies adopted by the U.S. government in 2020 in response to the COVID-19 pandemic.

The government lowered Fed interest rates to zero and unleashed a $5 trillion stimulus program to avert an economic disaster — far more than the $787 billion used to quell the 2008 recession.

The funds used during the pandemic buoyed the economy and helped boost demand for goods and services. However, supply chains were unable to keep up with the growing demand for certain commodities, hence the rise in commodity prices.

Of course, there are other compounding factors, such as the war in Ukraine, which has affected oil prices and led to higher transport costs.

These elements have led to a higher cost of living and reduced investments in speculative instruments such as Bitcoin due to less disposable income.

That said, Bitcoin prices can recover as soon as current socioeconomic dynamics change for the better.

Federal Reserve interest rates

In March, the U.S. Federal Reserve increased the lending rate for the first time since 2020. At the time, Bitcoin prices didn’t move by much because the rate was already factored in. 

However, the announcement prepped investors for upcoming changes…