Bitcoin Plunges Most in 2 Months, Dashing Recovery Hopes

·3 min read

Bitcoin (BTC) fell below $22,000 early Friday, reversing gains spurred by the softer-than-expected U.S. inflation figure released last week and leading the broader crypto market down.

The biggest cryptocurrency by market cap fell over 7% to as low as $21,500, the lowest price since July 27, CoinDesk data shows. The biggest single-day percentage decline in two months marked a continuation of the five-day downtrend that began near $25,000. Ether (ETH), the native token of Ethereum's blockchain, slid 6% to $1,730, while SOL, ADA and DOGE suffered double-digit losses, according to CoinDesk data.

In traditional markets, futures tied to the tech-heavy Nasdaq 100 slipped over 1%, and the dollar index rose to a one-month high of 107.77, indicating risk aversion. Shares of crypto-related stocks such as miners and crypto exchange Coinbase slumped in premarket trading.

Sentiment worsened after the Federal Reserve pushed back against expectations that inflation has peaked and that the central bank would slow the pace of interest-rate increases in the U.S. and adopt looser monetary policies in 2023. The minutes of the Fed's July meeting released Wednesday showed policymakers discussed the need to keep interest rates at levels that would be likely to weigh on U.S. economic growth.

"USD strength, especially post Fed minutes seem to be putting downward pressure on crypto, although the magnitude and velocity of today’s sell-off suggests that it might be a liquidation hunt on complacent, leveraged long positions," Dick Lo, CEO and founder of quant-driven trading firm TDX Strategies, said.

Matthew Dibb, chief operating officer and co-founder of Stack Funds, said crypto, as a risk asset, is taking a hard hit. "We are seeing a lot of macro weakness with bad [inflation] numbers from Germany. Major U.S. equity indices are off," he said.

Germany, Europe's biggest economy and an export powerhouse, reported a record jump in producer prices early Friday. The spike, at 37% over the past 12 months, was primarily driven by skyrocketing energy prices, according to Reuters.

Bitcoin's price recently climbed to almost $25,000 from $22,800 in hopes that the Fed would cut interest rates next year. Stocks also rallied, with the Nasdaq touching a three and a half-month high of 13,370 on Wednesday. Bond yields, however, have remained resilient since the Aug. 10 consumer price index data, a signal that traders might be wrong in making dovish assumptions. The U.S. 10-year Treasury yield rose to 2.95% Friday, the highest since July 21, extending the rally from the post-CPI low of 2.63%.

"Risk markets were due for a pullback after an impressive rally," Lo said, citing profit-taking as one reason for the drop in ether.

Laurent Kssis, managing director and head of Europe at crypto exchange-traded fund firm Hashdex, said long liquidations in ether since Wednesday have reached levels not seen for two months. According to coinglass.com, $117 million worth of ether long positions were liquidated on Friday, the most since July 28. Long liquidations are the unwinding of bullish futures-market positions by exchanges on account of margin shortages.

Aside from the risk reset in traditional markets, the optimism about Ethereum's long-pending software upgrade, dubbed the Merge, helped crypto markets regain poise over the past two months. Ether doubled to $2,000 in the four weeks to Aug 14.

Lo sees more pain ahead for the crypto market if bitcoin fails to hold support at $21,500.

"A break below could see $20,700 as the next level of support," Lo told CoinDesk. ING analysts foresee tightening of financial conditions heading into the Fed's September meeting, implying renewed volatility in risky assets.

Stack Funds' Dibb said bitcoin could fall toward $20,000 over the weekend when liquidity is low.

UPDATE (Aug. 19, 10:42 UTC): Rewrites headline for broader market; Adds quotes from TDX Strategies' Dick Lo, Hashdex's Laurent Kssis, Stack Funds' Matthew Dibb, performance of alternative cryptocurrencies and traditional markets.