Why is Bitcoin down from its March high?

Bitcoin recently dropped from its March peak, influenced by a stronger U.S. dollar and geopolitical issues. What should we expect next?

Bitcoin (BTC) has seen a sharp decline in its price, trading at around $63,000 levels as of Apr. 16. This comes after it reached an all-time high of $73,750 on Mar. 14, marking a 15% pullback from its peak.

The surge to the all-time high was largely propelled by the approval of spot Bitcoin ETFs by the U.S. SEC in January 2024. This development injected fresh capital from institutional investors into the market, driving prices to record levels.

Adding to the positive sentiment, on Apr. 15, Hong Kong regulators also gave the green light to spot Bitcoin and Ethereum ETFs, according to the HashKey blog announcement.

However, despite these favorable triggers, geopolitical tensions in the Middle East have emerged as a deterrent to investor enthusiasm. 

Amid this,  the fear and greed index, a key metric used to gauge investor sentiment, has witnessed a sharp decline from its previous highs. 

The index, which soared above 90 as Bitcoin reached its all-time high in March, has now dipped to 65, suggesting a gradual erosion of investor confidence, possibly fueled by a combination of geopolitical uncertainties and profit-taking.

So, what’s really happening in the Bitcoin market, and where could BTC be headed next? 

Factors affecting BTC price action

Several macroeconomic factors are at play that are affecting BTC price action. Let’s analyze them one by one:

Strengthening of U.S. dollar

Over the past three weeks, the US Dollar Index, which measures the Greenback against a basket of foreign currencies, has surged by 1.84%. This surge has coincided with a decline in BTC’s price.

The upward trajectory of the US Dollar Index could persist until it reaches above 107, marking the midpoint of a notable 13% crash observed between September 2022 and July 2023. 

If this projection holds true, Bitcoin may face further downward pressure unless a fresh rally occurs to counterbalance the dollar’s strength.

The primary reason behind the dollar’s strength is the changing expectations regarding interest rate cuts by the U.S. Federal Reserve. 

According to Bank of America projections, inflation is on track to hit 4.8% by the 2024 election, intensifying concerns about inflationary pressures.

Over the last three months, CPI inflation has averaged 0.4% on a month-over-month basis, indicating a persistent upward trend. 

If this trajectory continues, year-over-year inflation could reach its highest level since Apr. 2023, surpassing the Fed’s 2% long-term target by a high margin.

Previously, it was anticipated that the Fed would start cutting interest rates in June. However, the stronger-than-expected CPI data has led many to believe that the Fed may delay these rate cuts, boosting the value of the dollar.

Crypto assets are often seen as alternative investments, particularly during times of economic uncertainty or when traditional assets like the dollar show signs of weakness. 

Therefore, when the dollar strengthens due to delayed rate cuts, investors may be more inclined to hold onto or invest in traditional assets like the dollar, leading to a decrease in demand for BTC and other cryptos.

Rising geopolitical tensions

The recent escalation of conflict in the Middle East, notably sparked by Iran’s drone strike over the weekend, has potential implications for financial markets, including Bitcoin. 

In times of geopolitical turmoil, investors seek refuge in safe-haven assets perceived to offer stability and protection against market volatility. 

Such safe-haven assets traditionally favored by investors are the US dollar and gold, both of which have seen appreciation in prices lately.

Historically, instances of geopolitical turmoil have often coincided with rallies in the US dollar. 

For example, during periods of heightened geopolitical tensions in the Middle East, such as the Gulf War in the early 1990s or the Iraq War in the 2000s, the US dollar experienced upward pressure as investors sought safety amid geopolitical uncertainty.

Where could BTC price head next?

Recent data shows that Bitcoin dominates nearly 55% of the $2.27 trillion market for virtual currencies, a level not seen in three years. 

However, BTC’s price has dropped by almost 16% since its peak in March. Other cryptocurrencies have fared even worse, with declines exceeding 30-40% in some cases.

The introduction of Hong Kong-listed ETFs for Bitcoin initially boosted its value, briefly pushing prices to $66,500. However, the uncertain geopolitical climate has led to subsequent price retracements.

The next significant event for Bitcoin is the upcoming halving, which is just days away. Historically, the period preceding halving events has seen bearish sentiment, which may continue in the coming months.

Prominent analyst Willy Woo warns that if Bitcoin’s price falls below the support level of short-term holders at $58,900, it could enter a bearish phase. 

He points to indicators such as the sell-off on the cumulative volume delta (CVD), which measures market orders.

Adding to the analysis, cryptocurrency analyst Michaël van de Poppe suggests that Bitcoin is currently holding support levels, with the potential for a slow upward trend. 

However, he cautions that a loss of support could lead to a further decline towards $55,000.

Given these factors and the upcoming halving, expect increased volatility in the coming days. Remember not to panic and only to invest what you can afford to lose.