Bitcoin Volatility: Why BTC Fell 30% in Seven Days
Huge Bitcoin Volatility: BTC Falls 30% in Seven Days. Why?
Key Takeaways
- In August 2024 Bitcoin saw a 30% drop from $70,000 to $49,200 in seven days, influenced by macroeconomic factors.
- The Bank of Japan’s rate hike contributed to the crash, breaking key support levels and increasing market uncertainty.
- Bitcoin found temporary support at $49,200, with additional support coming at $46,000 and $32,000 with resistance at $55,000 and $60,400.
- Despite volatility, investors see potential trading opportunities at lower levels, anticipating further declines and rebounds.
Despite what technical analysis might suggest, Bitcoin saw a 30% drop from $70,000 to $49,500 in the first week of August 2024.
The support levels for lower prices are identified in the Bitcoin price prediction article. The current drop in price requires a fundamental assessment of the actions and signals from central banks. To understand what exactly is going on.
After seeing Bitcoin fall, you might wonder, “If Bitcoin is supposed to be ‘digital gold,’ why did it just fall 30% in seven days?”
The answer lies in Bitcoin’s dual nature as both an emerging store of value and a purely speculative asset in a digital age.
While Bitcoin is increasingly seen as a hedge against economic instability, it remains susceptible to market speculation, which implies volatility.
Adding to this volatility, Bitcoin’s price fell by 13% on the 5th August, falling below a predetermined key support level of $60,400. This sharp decline highlights the influence of broader economic factors on Bitcoin’s price movements.
The Current Economic Landscape
On August. 1, the Bank of Japan (BoJ) raised interest rates, a move that has had implications for global financial markets.
The Role of Central Banks
The BoJ’s move to raise interest rates marks a shift after decades of maintaining low to negative rates. This decision signals the BoJ’s attempt to combat inflation and indicates growing confidence in economic recovery.
The Bank of Japan
For only the second time in 17 years, Japan’s central bank has increased borrowing costs as part of its efforts to normalize monetary policy in the world’s third-largest economy.
Here’s a brief overview of the BoJ interest rates over the last two and a half decades:
- Late 1990s – Early 2000s: Japan entered a period of very low interest rates as a response to the economic stagnation In the early 1990s.
- 2000s: The BoJ implemented a zero interest rate policy to further stimulate the economy. During this period, interest rates were kept close to 0%.
- 2010s: The BoJ continued its low-interest rate policy and introduced negative interest rates in early 2016, setting the key interest rate at -0.1%.
- 2024: The Bank of Japan (BoJ) raised its key interest rate to approximately 0.25%, up from the previous range of 0% to 0.1%.
This 30% sell-off in Bitcoin might be the market reacting to the Bank of Japan’s interest rate hike due to several factors. Investors might be looking to shift funds from volatile assets like Bitcoin into more stable investments.
Additionally, whilst a rate hike does strengthen the Japanese yen, the hike makes Bitcoin more expensive to Japanese investors resulting in decreased buying pressure.
Furthermore, higher interest rates can increase overall market uncertainty surrounding high-risk assets, prompting investors to sell off Bitcoin to minimize exposure to high-risk assets.
The Bank of Japan’s Interest Rate Hike Impact on Carry Trades
Carry trades, which involve borrowing at low interest rates in one currency to invest in higher-yielding assets in another, have also been significantly impacted by the Bank of Japan’s (BoJ) recent interest rate hike.
Traditionally, traders borrowed Japanese yen due to Japan’s near-zero interest rates, investing the funds in U.S. stocks and Treasury bonds for higher returns.
However, the BoJ’s rate increase caused the Yen to strengthen against the U.S. Dollar, forcing traders to sell off U.S. dollar-denominated assets to cover increased borrowing costs and losses from currency fluctuations.
The higher interest rate strengthened the yen by increasing returns on yen-denominated investments, making the yen more attractive to investors and raising its value relative to the U.S. dollar. It also made it more expensive to take on high-risk assets.
This massive unwind of carry trades has resulted in extreme market volatility and led to a significant market downturn. With the rate announced on Aug. 1, Bitcoin was down 30% in price as a reaction to the Bank of Japan signaling their intention to tackle inflation.
The Federal Reserve
In contrast, the Fed faces a choice between maintaining current rates or reducing them.
The chart above shows how the Federal Reserve’s interest rate adjustments are typically lowered when there is the expectation of an economic downturn to stimulate growth and raised during periods of recovery and growth to control inflation and prevent overheating.
Understanding this context helps explain why interest rate cuts often follow or coincide with recessions, as they are tools used by the Fed to mitigate the impact of economic slowdowns.
Reducing rates would likely weaken the U.S. dollar and increase inflation, stimulating short-term economic activity but increasing long-term inflationary pressures.
If the Fed reduces rates, it is a bullish signal for Bitcoin, potentially indicating that Bitcoin is currently priced at a discount when ranging between $54,000 – $48,000. Lower rates often lead to increased money printing, which can drive up Bitcoin prices as investors seek inflation hedges.
Bitcoin Price: In Response to the Bank of Japan Rate Hike
In response to the BoJ rate hike, Bitcoin saw a huge drop from its $70,000 resistance, falling to around $48,000, highlighting high volatility.
In only 24 hours, Bitcoin’s price fell by 13%, dropping below the key support level of $60,400, identified in the Bitcoin Price Prediction article, which further accelerated the decline.
The $48,000 mark emerged as a support level, where Bitcoin’s price tested and bounced back, showing strong buying interest around this price.
Currently, Bitcoin is trading around $54,300, indicating some recovery. The term “Dead Cat Bounce?” The chart above suggests skepticism about the sustainability of this recovery, implying it might be a short-lived rebound before further declines.
The price was even corrected by the length of the rectangle channel being 18%. It is unclear if the bottom for this correction is due to the ongoing economic uncertainty around the world; however, in the last seven days, Bitcoin has fallen considerably.
The Fed’s Political Dilemma: Raise, Maintain, or Reduce? Trump Advises Caution
If the Federal Reserve maintains or raises interest rates, it would signal a strong commitment to controlling inflation, enhancing its credibility. However, this approach could risk economic growth, potentially leading to a market implosion as higher rates make borrowing more expensive, reducing spending and investment.
Conversely, if the Fed opts to reduce interest rates, it would likely weaken the U.S. dollar and result in higher inflation. This decision could lead to increased money printing to manage the national debt, which has ballooned into trillions of dollars. Such a move would stimulate economic activity in the short term but could exacerbate inflationary pressures similar to the Great Inflation period of the 1970s.
Case Study on Strategy to Combat US Inflation in the 1970s and Federal Reserve Chairman Arthur F. Burns
Arthur Frank Burns was an American economist and diplomat who served as the 10th chairman of the Federal Reserve from 1970 to 1978. During his tenure, Burns faced significant challenges during the Great Inflation of the 1970s.
One key criticism of the Federal Reserve’s leadership was its delayed response to increasing interest rates to combat rising inflation. In the early 1970s, inflation began accelerating due to various factors, including oil price shocks, expansive fiscal policies, and accommodative monetary policies.
Despite the growing inflationary pressures, Burns and the Federal Reserve were slow to raise interest rates. This delay in implementing tighter monetary policies contributed to the persistence of high inflation throughout the decade.
It wasn’t until Paul Volcker succeeded Burns as chairman in 1979 that the Federal Reserve took more aggressive action to control inflation by significantly raising interest rates. This eventually helped stabilize the economy but also led to a severe recession in the early 1980s.
Trump Advises Against Federal Reserve Interest Rate Cuts Before Election, Citing Inflation Concerns
In an interview with Bloomberg Businessweek , former President Donald Trump expressed that the Federal Reserve should not cut interest rates before the presidential election.
During the June 25 interview, published on July 16, Trump mentioned that while the Fed may consider cutting rates, it’s something that Fed Chair Jerome Powell and other Fed members “know they shouldn’t be doing.”
Trump stated that the Fed has a “dream” to lower interest rates, but he advised against it. “Right now, you have to keep rates where they are,” he said, citing inflation as a major concern. “Inflation is a country buster,” Trump emphasized, adding that although he knows Fed members want to cut interest rates, he would not do so before the presidential election.
His stance contrasts with the views of some economists and Democratic lawmakers who argue that rate cuts are needed soon.
Bitcoin’s Role in the Current Environment
Bitcoin’s recent volatility can be partly attributed to these macroeconomic factors. The cryptocurrency market is highly sensitive to changes in interest rates and economic policies. Risk-averse investors often shift their assets from volatile investments like Bitcoin to more stable ones, leading to significant price drops when rates are expected to rise.
Moreover, the current economic uncertainty has led to broader market uncertainty, both economically and politically. Investors are wary of potential interest rate hikes and their impact on the economy while still unsure about how policy and regulation will be handled in the very near future.
Implications of the Fed’s Decision
In both scenarios, Bitcoin will continue to experience significant volatility. Having said that, Investors should remain vigilant and consider the broader economic context when making investment decisions.
Bitcoin’s recent price activity might seem alarming at first glance. However, regardless of whether interest rates are hiked or cut, Bitcoin’s core strengths shine through, making it a compelling asset to consider, especially during turbulent times.
- Interest rate hikes: When interest rates rise, borrowing costs increase, and investors often shift towards assets offering stable returns. However, Bitcoin’s decentralized nature and limited supply make it an attractive hedge against inflation and currency devaluation. As seen during previous rate hikes, while short-term price volatility may occur, Bitcoin’s long-term value proposition remains intact.
- Interest rate cuts: When interest rates are cut, money printing often increases to stimulate economic activity. This can lead to higher inflation, diminishing the value of fiat currencies. Bitcoin, with its fixed supply and deflationary characteristics, becomes an even more attractive store of value.
Key Levels to Watch In Bitcoin Right Now
In the recent Bitcoin price prediction article, we highlighted some lower targets of $46,000 and $32,000 as key levels to watch, possibly serving as a favorable position to enter the market.
In the recent Bitcoin price prediction article, we highlighted some lower targets of $46,000 and $32,000 as key levels to watch, possibly serving as a favorable position to enter the market.
For the sake of comparison, the 2020 COVID crash saw Bitcoin’s price crash by 50%, from around $7,800 to approximately $3,800, in just two days. In 2024, Bitcoin experienced a similar style crash, dropping 30% from $70,000 to $49,200 over the course of seven days. Whilst not the same Bitcoin’s August 2024 crash is reminiscent of that black swan event in 2020 so far.
Bitcoin’s price has since found support at the $49,200 level, showing early strong signs of recovery and stabilizing around $54,500. This level has held, providing temporary support, with ultimate support coming in at $32,000, short-term resistance levels at $55,000, and larger resistance at $60,400, which was previous support.
Investors, recognizing the potential for a rare trading opportunity, have placed limit orders at these lower levels, anticipating that Bitcoin could revisit the low $30,000 range.
Conclusion
The current economic environment, marked by recent policy decisions by the Bank of Japan and the looming decisions by the Federal Reserve, creates a complex landscape for investors.
Bitcoin’s recent price drop is a reflection of these broader economic uncertainties. As the Federal Reserve navigates its next moves, the implications for inflation, the U.S. dollar, and financial markets will be profound.
Investors must stay informed and prepared to adapt to this evolving economic landscape.
