After a long period of volatility, Bitcoin has enjoyed an extended stint of virtually uninterrupted growth that has seen it rise from $16,529 in December 2022 to over $64,000 today (7 May 2024). The first cryptocurrency has also seen many key milestones in 2024, with the approval of the first spot BTC ETFs in January and the much-anticipated halving event that took place around 20 April 2024. Many believed that the hype surrounding these key events was the reason that Bitcoin defied the odds to keep rising throughout 2023, even when other risk assets were struggling with higher interest rates and growing inflation. But now that the per-block mining reward has been cut in half amid a doubling of difficulty, the cracks are beginning to show in this latest BTC bull market.
After the halving event, Bitcoin lost over 20% of its value after reaching an all-time high of $71,618 in April before recovering slightly. Given Bitcoin's bubble-ridden history, it's not unsurprising that some investors are beginning to feel uncomfortable. So, is this latest drop a sign of an impending crypto winter or just a small blip on the road to $1 million per BTC? In this article, we'll look at the various factors that are mediating the cryptocurrency market at present and seek to predict where they could take Bitcoin in the coming months.
Keep calm and carry on
First, it's crucial to note that a 20% correction is far from unusual in a market like crypto. In fact, we've already seen bigger legs down this year alone. In March, BTC's price dropped by over 17%, after falling an almost equal amount back in January once the spot ETFs went live. After a hugely anticipated event finally comes to pass, it's totally normal for the market to drop slightly as whales look to take their profits at the top of the hype cycle.
Coin-rich miners will also doubtlessly be looking for cash injections in order to make the necessary equipment investments to stay competitive in a post-halving world of increased mining difficulty. And that's without even mentioning the fact that BTC was up over 400% from its last major bear market when the correction began. It's not only natural for investors to be looking to take profits in such a scenario. It's actually a good thing to have small corrections. This is the hallmark of a stable asset class and bodes well for Bitcoin's efforts to shed its bubble-prone label.
A final factor that might have helped tip the scales in favour of a decline this past week was the anticlimax of Hong Kong's spot ETF launch. After much debate, it was eventually revealed that Mainland Chinese investors wouldn't be able to access the new instruments, resulting in a significant letdown after considerable anticipation had already been priced into the market.
Watch the macros
While a correction like the one we've seen is certainly natural, investors would be wise to keep their eyes on the macroeconomic factors that could threaten a bear market in risk assets as a whole. For instance, for the US, the threat of stagflation — a period of low growth coupled with high inflation — is very real. As QCP wrote in a recent note: "The weaker than expected GDP print points to a more sluggish economy while the higher Core PCE warns of an inflation problem that continues to be a thorn in the Fed's side."
Indeed, the most recent GDP report did demonstrate a quarter-over-quarter decline of 1.8%, while the personal consumption expenditures price index (PCE) revealed a 3.4% year-over-year increase in prices in Q1 2024 compared to just 1.8% in Q4 2023. Given the Fed's historic preference for these two metrics, it was no surprise that the US regulator held back on those all-but-priced-in rate cuts.
Going forward, we can expect a much lower appetite for risk assets, particularly among institutional investors. Nonetheless, US Treasury Secretary Janet Yellen's fiscal strategy, which involves leveraging the almost $1 trillion-strong Treasury General Account (TGA) and the some $400 billion held in the Reverse Repurchase Program (RRP), could inject up to $1.4 trillion in liquidity into the financial system and help buoy all risk assets, including Bitcoin. Only time will tell where BTC is headed into 2025, but the writing is far from on the wall just yet.
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