After struggling in May, Bitcoin (BTC +1.35%) snapped out of its funk today and had risen nearly 5% over the last 24 hours, as of this writing. Still down more than 34% this year, investors are anxiously trying to find a bottom in what has been a long and difficult year for cryptocurrencies. So, what's causing Bitcoin to climb higher today, and has the token finally bottomed? Let's take a look.
It's complicated
Bitcoin has seen intense selling pressure this year and has largely moved with the broader markets, trading similarly to tech and growth stocks. As inflation has surged and the Federal Reserve has guided for fast and aggressive hikes to its federal funds rate, the overnight rate at which banks borrow from one another, cryptocurrencies have sold off like other growth stocks. Part of this is due to the fact that as the federal funds rate climbs, so do the yields on safer assets like U.S. Treasury bills. This makes risky assets like Bitcoin, which went on a monster run in 2021, much less appealing.
Image source: Getty Images.
Additionally, the Fed has started the daunting task of shrinking its $9 trillion balance sheet in a process known as quantitative tightening by reducing the amount of bonds it holds on its balance sheet. By August or September, the Fed expects to be reducing its bond holdings by $95 billion per month, meaning it could shrink its balance sheet by more than $1.1 trillion in a year. While the impact of this measure is more or less unknown, the Fed will essentially be pulling liquidity out of the economy, potentially leaving fewer funds to flow into riskier assets like crypto.
CRYPTO: BTC
Key Data Points
"We believe this relief rally is a bull trap, and that bitcoin may have a short-lived gain but is more than likely going to resume the downward trend we've seen for the past two months," Josh Olszewicz of Valkyrie Investments said this morning, according to CNBC. "Uncertainty in the global economy due to high inflation and the likelihood we are in a recession, paired with the prevalence of central bankers raising rates, is likely going to force all assets downward at least through the end of the summer."
A possible explanation for Bitcoin's run today is that the Chinese government is lifting restrictions in major cities that were put into place after the country saw a resurgence of COVID-19 cases earlier this year. Some cities like Shanghai have been locked down for months. This could ease supply chain issues, which may help ease inflation. If inflation shows a real and steady decline, then the Fed may be less pressed to raise rates or conduct quantitative tightening so aggressively.
Has Bitcoin bottomed?
At this point, I have no clue whether Bitcoin has bottomed and would not recommend ever trying to predict or forecast a market bottom or top. Rather, you should be investing in assets that have good long-term value.
I do think Bitcoin could go lower in the near term because the Fed's monetary policy is still quite unclear right now. Currently, the market expects three half-point hikes this year and quantitative tightening to press on. This will have the effect of making safer assets yield more and pulling liquidity out of the economy, both of which could hurt the allure of Bitcoin and send its price lower.
But long-term, I fully expect Bitcoin and at least several other cryptocurrencies to be around and generate good value. That's why I do see the pullback of Bitcoin this year as a good opportunity, even if there could be more volatility ahead in the near term.
