With the possibility of renewed tightening rising, bitcoin is losing momentum and becoming more vulnerable to exogenous shocks and potential rate hikes.
The United States and the broader global economy are facing an increasingly fragile macroeconomic backdrop. U.S. inflation has risen to 3.8% year-over-year, per April consumer price index (CPI) data, and real wages have turned negative with long-term Treasury yields climbing to multi-year highs.
Amid a hostile macro environment, bitcoin (BTC) has pulled back and erased the gains from its early-month rally. This correction is further driven by weakening institutional demand and outflows from spot exchange-traded funds (ETFs).
Weakening Institutional Demand
According to this week’s Bitfinex Alpha report, the U.S. macro backdrop has shifted toward a “higher-for-longer inflation environment.” Market expectations for Federal Reserve rate cuts have been removed, with rate hikes becoming a more likely scenario as the year progresses.
With the possibility of renewed tightening rising, bitcoin is losing momentum and becoming more vulnerable to exogenous shocks and to a high-for-longer interest rate regime. Unfortunately, this development comes at a time of deteriorating liquidity conditions – the worst since February.
Analysts said the two primary engines of marginal demand, which are spot ETFs and yield-bearing products like Strategy’s STRC, are currently under duress. ETFs ended their six-week inflow streak last week, recording almost $1 billion in net outflows. On-chain capital flows currently sit at $2.8 billion, far below the $10 billion historically associated with durable bull phases.
“As market sentiment transitions from acute fear toward persistent uncertainty, analysts say the validity of the current recovery now hinges almost entirely on whether fresh net capital continues entering the market,” analysts explained.
Market Vulnerable to Further Downside
As Bitfinex warned two weeks ago, the Bitcoin market is not positioned for sustained upside. Despite the rally toward $82,000, institutional conviction has remained insufficient to absorb macro shocks and rate volatility, leaving the market vulnerable to further correction. Bitcoin is already trading at a two-week low, reflecting a significant structural problem that could worsen due to hostile macro conditions.
At the time of writing, BTC was trading around $76,700, roughly 6.5% below its weekly opening of $82,160. While the asset is testing levels near the monthly open, analysts expect the price to fluctuate between $72,000 and $80,000. Net capital flows, as measured by the Realized Cap 30-Day Net Position Change, will determine whether the broader recovery structure remains intact in the coming weeks.
