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The high-profile Fed meeting, which led to a sharp rise in the dollar, indirectly led to the fall of bitcoin.
Research has shown that investors moved a record amount of cash overnight to the Federal Reserve after the central bank began paying interest on these investments.
The central bank received $756 billion in its buyback program from nearly 70 market participants on Thursday. The deposit amount is about $172 billion more than last week, and about $235 billion more than on Wednesday, when only 53 investors took advantage of the opportunity.
This is a reverse repo operation, where the money comes mainly from funds and banks sponsored by the state.
Why did these large investors suddenly neglect Bitcoin and channel funds in a different direction?
Until Wednesday, the service offered eligible users a zero return rate. But after the Federal Reserve reported a faster and earlier interest rate hike - in 2023 instead of the previously expected 2024 - the credit line raised its repo interest rate to 0.05%.
Due to the Fed's quantitative easing program, excess dollar liquidity poured into money market funds. They invested this money in short-term government securities. The increased demand for these securities often led to a decrease in their profitability, which at times went into the negative zone.
Due to negative returns, investors were looking for other assets to invest in and preferred Bitcoin. Excess liquidity due to QE, negative rate securities has proven to be one of the main bullish catalysts for Bitcoin and other digital assets since March 2020. Unlike conventional bonds, the cryptocurrency sector has promised better returns.
But the Fed's hawkish tone on Wednesday boosted the yields on traditional and safe bonds, and since they are less risky than cryptocurrency or gold, the money that could have previously been invested in bitcoin went to the Fed repo market. "We seem to be seeing a growing inverse correlation between the bitcoin price and the Fed reverse repo market," said Petr Kozyakov, co-founder and CEO of Mercuryo, a cryptocurrency wallet service.
He stressed that many investors choose the more volatile bitcoin as it promises higher returns. However, given the current market trends, some cryptocurrency investors may be getting rid of their positions as the dollar's outlook is vital at this point.
And Raoul Pal, founder of Global Macro Investor, nonetheless believes the Fed's liquidity problems won't hurt alternative hedging assets like Bitcoin and gold in the long run.
He noted that the US government tends to promote large stimulus packages, the Fed's balance sheet will expand, the central bank will continue to buy sovereign debt, thereby reducing bond yields, restoring the appeal of crypto assets.
But so far (thanks to the Fed), Bitcoin has broken through the level of 38,610.88 (red dotted line) and consolidated above it. This means that the phase of accumulation and sideways consolidation in the market continues. The closest targets for the fall of BTC/USD are the level 34,708.27, and upon its breakdown - the horizontal level 31,082.82, the lower red dotted level that stopped the price twice (May 23 and June 8).
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