Bitcoin (BTC) closed above $68,000 for the last time on April 11, despite briefly surpassing $67,000 multiple times in the following days. While Bitcoin saw a 2% gain on May 20, it still needs to make a 7% move to reach its all-time high. In contrast, gold reached a record high of $2,450 on May 20, and the S&P 500 index reached its peak at 5,325 points. These developments have left BTC investors wondering about the factors holding back its progress.
One could argue that Bitcoin’s 51% year-to-date gains reflect investor anticipation of the recent monetary expansion that has benefited other assets. In situations where the US Federal Reserve needs to inject liquidity to support the troubled banking sector or stimulate the economy, investors typically turn to scarce assets as a form of protection. This inclination is even stronger if there is an increasing likelihood of an economic recession.
According to data from the US Federal Reserve, the broader US monetary base (M2) surpassed $21.0 trillion in April 2024, marking the end of a contraction period that began in April 2022. Despite current hesitations from companies and individuals to spend, the increase in circulating money suggests rising inflationary pressures.
However, it would be oversimplistic to assume that the US government will continue to add liquidity if inflation remains a major public concern. The Federal Reserve might choose to reduce interest rates while implementing measures to restrain the economy, such as increasing banks’ reserve requirements. This approach could slow down the expansion of the M2 monetary base in the hopes of achieving a “soft landing” and avoiding a recession following a period of high interest rates.
Bitcoin’s price is being influenced by various factors, some external to the cryptocurrency market and others related to the dynamics of Bitcoin trading and momentum. For example, Chinese authorities announced plans on May 17 to address the troubled real estate market in the region. This decision highlighted the risks of an economic downturn due to the fragile conditions of the real estate sector. Investors remain skeptical that the central bank’s one-off intervention will resolve the issue.
The risk of an economic crisis triggered by the real estate sector extends beyond China, as noted by Starwood Capital Group CEO Barry Sternlicht on May 15. He stated that commercial real estate is facing a balance sheet crisis, making it difficult for borrowers to refinance debt due to rising interest rates. Sternlicht also predicted that regional and community banks in North America are likely to face difficulties.
While the increased risk of an economic recession may seem beneficial for Bitcoin as it was designed to function as an independent financial system, it is important to recognize that Bitcoin is still not widely adopted, particularly as a closed-loop economic system or means of exchange. Investors often view Bitcoin as a risk-on asset rather than a primary hedge option.
On May 20, the CEO of asset manager Grayscale, Michael Sonnenshein, announced his resignation after a decade with the firm. Grayscale manages the Grayscale Bitcoin Trust (GBTC) spot exchange-traded fund. Concerns have risen among investors that a portion of the $19.4 billion GBTC fund might be liquidated, which could have a negative impact on Bitcoin’s price.
This article does not provide investment advice or recommendations. Each investment and trading decision carries risks, and readers should conduct their own research before making a decision.