Bitcoin (BTC) recently closed above $68,000 for the first time since April 11, although it has been trading above $67,000 multiple times in the past week. Despite a 2% gain on May 20, the cryptocurrency still needs to rise by another 7% to reach its all-time high. In contrast, gold reached a record high of $2,450 on the same day, and the S&P 500 index reached its peak of 5,325 points. These developments have left BTC investors wondering what factors are holding back its progress.
One possible explanation for Bitcoin’s 51% gains this year is that investors are anticipating the recent monetary expansion that has benefited other assets. When the United States Federal Reserve injects liquidity into the economy to support the banking sector or stimulate economic growth, investors often turn to scarce assets for protection. This tendency becomes even stronger when there is a higher likelihood of an economic recession.
Data from the US Federal Reserve shows that 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. This increase in circulating money suggests rising inflationary pressures, even though individuals and companies are currently hesitant to spend. However, it is too simplistic to assume that the US government will continue to add liquidity if inflation remains a major concern. The Federal Reserve may choose to reduce interest rates while implementing measures to restrain the economy, such as increasing banks’ reserve requirements. This strategy aims to slow down the expansion of the M2 monetary base in order to achieve a “soft landing” and avoid a recession following a period of high interest rates.
Bitcoin’s price is also affected by external factors, such as the weak global real estate sector. On May 17, Chinese authorities announced plans to address the issues in their real estate market, highlighting the risks of an economic downturn. The People’s Bank of China (PBOC) will provide $42.2 billion to state-owned enterprises to purchase unsold apartments, but some experts doubt that this intervention will have a significant impact. The risk of an economic crisis triggered by the real estate sector is not limited to China, as noted by Starwood Capital Group CEO Barry Sternlicht, who predicts that commercial real estate will face a balance sheet crisis and that regional and community banks may start failing.
Another factor affecting Bitcoin’s price is its limited adoption and the pressure from Grayscale’s holding firm. While the increased risk of an economic recession can be seen as beneficial for Bitcoin, as it was designed to function as an independent financial system, it is still not widely adopted as a mainstream closed-loop economic system or means of exchange. Therefore, investors often view it as a risk-on asset rather than a primary hedge option. Additionally, concerns have been raised about the possible liquidation of a portion of the $19.4 billion Grayscale Bitcoin Trust (GBTC) fund, which could have a negative impact on Bitcoin’s price.
It is important to note that this article does not provide investment advice or recommendations. Readers should conduct their own research and analysis before making any investment or trading decisions.