Bitcoin Hits $68K Amid Headwinds

Bitcoin (BTC), which last saw a closing price above $68,000 on April 11, has hovered around $67,000 multiple times over the past five days. Despite a 2% uptick on May 20, there’s still a 7% gap before Bitcoin can achieve its all-time high. Concurrently, gold reached an unprecedented high of $2,450, and the S&P 500 index surged to a record 5,325 points on May 20. These developments have left Bitcoin investors contemplating the underlying factors hindering BTC’s price momentum.

Bitcoin’s 51% gain year-to-date suggests that investors had forecasted the U.S. monetary expansion that has recently benefited various assets. The Federal Reserve’s need to infuse liquidity into the economy, whether to rescue struggling banks or stimulate growth, often prompts investors to seek refuge in scarce assets. This trend becomes more pronounced if an economic recession appears to be on the horizon.

According to data from the U.S. Federal Reserve, the broader monetary base (M2) had been stagnant at $20.8 trillion since May 2023. It breached the $21.0 trillion mark in April 2024, ending a contraction period that began in April 2022 when the M2 indicator peaked at $22 trillion. Regardless of the interest rate trajectory, the rise in circulating money points to looming inflationary pressures, even if current spending by businesses and individuals is sluggish.

It’s important to realize that the U.S. government is unlikely to continue injecting liquidity if inflation remains a pressing issue. For instance, the Federal Reserve might opt to lower interest rates while implementing measures to cool the economy, such as increasing banks’ reserve requirements. This approach could decelerate the expansion of the M2 monetary base, aiming for a “soft landing” to avert a recession after a phase of high interest rates.

Several factors are dampening Bitcoin’s price, including both external pressures and internal market dynamics. Notably, on May 17, Chinese authorities announced measures to stabilize the region’s ailing real estate market. The decision highlighted economic risks due to the sector’s precarious state. The People’s Bank of China (PBOC) plans to allocate $42.2 billion to state-owned enterprises for acquiring unsold apartments. Macquarie’s chief China economist, Larry Hu, mentioned that local government resources “may be too limited to move the needle at the macro level” and hinted at the need for more central government intervention.

The risk of a real estate-induced economic crisis isn’t confined to China. On May 15, Starwood Capital Group CEO Barry Sternlicht voiced concerns about a looming “balance sheet crisis” in commercial real estate, particularly in North America. Sternlicht warned that rising interest rates would make debt refinancing challenging, potentially causing regional and community banks in North America to fail.

From one vantage point, the heightened risk of an economic recession could ostensibly benefit Bitcoin, designed to be an independent financial system. It’s crucial to acknowledge Bitcoin’s limited mainstream adoption, especially as a closed-loop economic system or primary means of exchange. This is why, when seeking a hedge, investors often see Bitcoin as a risk-on asset rather than a primary option.

Adding to the pressure on Bitcoin’s price is news from May 20 that Michael Sonnenshein, CEO of Grayscale asset manager, resigned after a decade of leadership. Grayscale oversees the GBTC spot exchange-traded fund (ETF), and its parent company, Digital Currency Group (DCG), faced significant turmoil after its crypto lending and trading arm, Genesis, filed for bankruptcy in January 2023.

This situation has spurred investor concerns that part of the $19.4 billion GBTC fund might be liquidated, which could adversely affect Bitcoin’s price. Hence, despite economic conditions that could theoretically favor Bitcoin, tangible hurdles such as adoption limits and institutional pressures continue to constrain its progress.