(Bloomberg) — Bitcoin’s plunge is piquing interest among investors who see pronounced swings in the digital token as a possible harbinger of broader shifts in risk appetite in global markets.
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The cryptocurrency has fallen about 4% in the past two days after plunging nearly 16% in April, its sharpest monthly decline since the implosion of Sam Bankman-Fried’s FTX digital asset empire in November 2022. The token changed hands at $57,359 on December 11, 2020: 5 p.m. Thursday in Singapore, about a two-month low.
Some investors are scouring Bitcoin inflections for signs of changing liquidity dynamics that may drag down other assets. The token fell in recent weeks as the Federal Reserve signaled interest rates would stay higher for longer, a mantra that tightened financial conditions by boosting Treasury yields and the dollar.
“Bitcoin is our favorite canary,” Charlie Morris, chief investment officer of ByteTree Asset Management, wrote in a note. “It warns of impending difficulties in financial markets, but we can be confident that it will eventually bounce back.”
“Recent strength in the US dollar could be a sign of impending market tightness,” Morris added.
The largest digital asset hit a record high of nearly $74,000 in mid-March, buoyed by a flood of inflows into the first U.S. spot Bitcoin exchange-traded funds from companies including BlackRock Inc. and Fidelity Investments.
Demand for the products then waned, and markets received no tailwind from the launch of spot Bitcoin and Ether ETFs in Hong Kong this week. Discounts on the net asset value of some US portfolios have widened to record levels, underscoring the challenges that can arise from Bitcoin volatility.
Read more: Bitcoin ETF discounts hit records after late-day selloff
According to data compiled by Bloomberg, Bitcoin recorded four declines in April over the past decade, three of which followed May losses averaging 18%.
However, if inflationary pressures ease and markets revive their bets on a much looser stance from the Fed, crypto and other speculative investments could see some relief.
Fed Chairman Jerome Powell kept hopes of a rate cut this year alive after the central bank concluded its final meeting on Wednesday. However, he also acknowledged that a surge in inflation had undermined confidence that price pressures would ease.
“The next three to four months will be less optimistic and more risk-oriented, with the market closely monitoring inflation, employment and economic data for unexpected shocks or to gain confidence about possible interest rate cuts,” said Youwei Yang, chief economist and vice president of the Crypto Miners BIT Mining Ltd.
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