The world's largest cryptocurrency by market capitalization, Bitcoin, dropped as much as 2.3% during early Asian trading on Tuesday, hitting $63,414, its lowest point in 11 days. The second-largest cryptocurrency, Ethereum, fell by 3.6%. Market sentiment is being dampened by rising expectations of a Federal Reserve interest rate hike ahead of the central bank's upcoming policy meeting.
The Federal Reserve is scheduled to hold its interest rate-setting meeting from July 28 to 29 (this Tuesday and Wednesday), with the rate decision due on Wednesday. Market consensus suggests the Fed will hold its benchmark interest rate steady. However, Citadel Securities has predicted that the Fed will raise rates by 25 basis points this Wednesday, a surprising move that would enhance the credibility of Fed Chairman Kevin Warsh in addressing inflation. Traders estimate the probability of a rate hike at about one-third.
Higher borrowing costs typically encourage investors to move away from risk assets such as cryptocurrencies. With only one day remaining before the Fed's rate decision, a significant divergence of opinion on whether the central bank will hike or hold rates remains, a rare occurrence in recent years. The new policies being implemented by Warsh are significantly amplifying market uncertainty, primarily by abandoning traditional "forward guidance" in favor of a decision-making model that is more reliant on real-time data, internal negotiations, and reduced transparency.
"Bitcoin is being primarily impacted by the rising possibility of a Fed rate hike and concerns over credit risk related to artificial intelligence (AI)," said Carolyn Mollen, co-founder of Orbit Markets. "The next downside target to watch is $62,000, with strong support expected around $60,000."
As expectations of a Fed rate hike increase, Bitcoin is declining. Reports indicate that NVIDIA Corp (NASDAQ: NVDA) is advancing a new round of AI infrastructure deals potentially worth over $750 billion. Following this news, investor concerns about NVIDIA's potential financial risks have intensified, with its five-year credit default swap (CDS) price recording its largest single-day increase ever on July 27. Critics have pointed out that such deals may have a circular nature, where NVIDIA provides financing or guarantees to clients, who then purchase NVIDIA's chips, potentially artificially inflating industry demand and valuations.
Over the past month, the price of Bitcoin has risen slightly, following expectations that the token had bottomed out after a roughly 50% crash from its record high of $126,000 in October last year. However, late last week, US-listed Bitcoin exchange-traded funds (ETFs) experienced significant outflows, highlighting the fragility of the recent rebound. On July 23 and 24, these ETFs saw net outflows exceeding $465 million, ending a streak of seven consecutive days of capital inflows.
Rate hike concerns have overshadowed recent progress on the US Digital Asset Market Clarity Act. The bill is at a critical stage of Senate deliberation, with its core aim being to clarify whether digital assets are "securities" or "commodities" and to delineate the regulatory boundaries between the SEC and the CFTC. Some analysts suggest that if the bill passes, the crypto industry would move from a "gray area" toward compliance, allowing traditional financial institutions to directly participate in digital commodity custody and trading.
"We are currently neutral on Bitcoin," said Tony Sycamore, an analyst at IG Australia. "Bitcoin still needs to achieve a sustained break and close above its 200-day moving average, currently at $72,001, to eliminate the medium-term downside risk, reignite market enthusiasm, and form a more constructive technical picture."