According to Andre Dragosch, director and head of research Europe at Bitwise, bitcoin remains on the defensive and is offering an opportunity to "buy the dip" for investors.
Dragosch, who has been a bullish analyst on Bitcoin (BTC) for months, has grown cautious lately after the 8% drop last week, issuing warnings that the losses might be even more profound in the coming weeks.
Bitcoin's Recent Slump
The world's leading cryptocurrency by market value slid 8.8% last week to near $95,000-the largest percentage decline since August.
The declines were triggered by hawkish signals from the Federal Reserve, which projected fewer rate cuts for the next year.
The Fed also restated its prohibition from holding BTC and lack of intent to try and alter the law to do so.
These hawkish rate expectations further affected traditional markets and dragged the S&P 500 down 2%.
On the dollar index, though, there was an 0.8% advance as the same continued its journey towards reaching a peak not witnessed since October 2022.
And then the 10-year Treasury note's yield improved 14 basis points to breakout of a technical formation in a very bull-friendly way. This speaks to risk-off sentiments which can prevail for a bit.
Macro Pressure on Bitcoin
Dragosch stresses the macroeconomic challenges driving the Bitcoin price fluctuations. "The big macro picture is that the Fed is stuck between a rock and a hard place as financial conditions have continued to tighten despite three consecutive rate cuts since September," Dragosch explained.
He noted that real-time measures of consumer price inflation have re-accelerated over recent months, as evidenced by Truflation's U.S. inflation indicator.
Dragosch has been cautious while, to his credit, getting right one large BTC rally in late July that pushed Bitcoin up from lows around $50,000 into recently topping $100,000 for the first time on record.
Now, he sees more pain ahead, but believes there is still buying to be done in these next weeks as the tailwinds driving BTC continue on because of its supply deficit.
Treasury Yields and the Dollar
Normally, higher yields mean higher borrowing costs and less relative appeal to fixed income investments, forcing outflows from risky assets such as cryptocurrency and stocks.
A more strengthening dollar increases the cost of dollar-based assets and depresses inflows. Such factors add to the string of recent losses that have been coupled with overall risk aversion sentiment in the markets.
The second issue is the dynamics of inflation.
Dragosch notes that the current inflation is similar to the inflation scenario of the 1970s, a period characterized by a double wave of price pressures.
"The sticky CPI inflation readings in recent months have raised concerns at the Fed about a potential second wave," Dragosch said.
"They are probably wary of the double-hump scenario and a revival of the 70s twin peak in inflation, that is why they are resisting slashing rates more aggressively".
The Federal Reserve is worried about accelerating inflation if it cuts rates too aggressively. However, doing too little would harm the economy.
Dragosch believes that the financial tightening from rising yields and the dollar index will eventually force the Fed to act.
Long-term bullish factors for Bitcoin
Despite the short-term obstacles, Dragosch believes the long-term outlook for Bitcoin is bright. Dragosch stresses that the supply scarceness of BTC is one of the crucial bullish factors.
"The continuing tailwinds from the BTC supply deficit make stretched price drops an interesting buying opportunity," Dragosch said. This supply scarcity along with eventual monetary easing may form the bases for future price recoveries.
Market Sentiment
The broader market sentiment remains cautious. The Federal Reserve’s hawkish stance has introduced uncertainties, prompting investors to reassess their positions.
Dragosch’s analysis reflects this sentiment, offering a balanced view of the risks and opportunities in the current market environment.
As the market grapples with these macroeconomic headwinds, investors will closely watch for inflation, interest rates, and Bitcoin price moves.
The interaction of these variables will determine the cryptocurrency outlook in the coming weeks and months.
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