Bitcoin Taps $60K As Investors Grapple With Rate Hike, Record ETF Outflows

Key takeaways:

• Persistent spot Bitcoin ETF outflows and US dollar strength reduce the odds of a quick bounce to $65,000.
• Strong AI sector earnings momentum and higher fixed-income returns pull capital from Bitcoin and gold.

Bitcoin (BTC) reacted positively to US Federal Reserve Chair Kevin Warsh’s remarks on stubborn inflation. Despite the gains on Wednesday, traders fear that incentives for fixed-income investments and strong earnings momentum in tech stocks will continue to pressure non-yield-bearing assets like cryptocurrencies.

US 5-year Treasury yield (left) vs. Bitcoin/USD. Source: TradingView

The US 5-year Treasury yield jumped to 4.22%, meaning traders demanded higher returns to hold government bonds. Even as inflation eventually eases and WTI crude oil prices fell to a 4-month low, investors anticipate monetary expansion. Regardless of how the Fed manages interest rates and its balance sheet, the US Treasury dictates debt issuance trends.

Implied odds of FED interest rates on Sept. 16. Source: CME FedWatch Tool

US government bond futures implied 64% odds of interest rate hikes by September, up from 23% one month prior. The higher expected return on fixed-income investments came as the US dollar strengthened against other major global fiat currencies, which is especially concerning for alternative hedges such as gold and Bitcoin.

Gold/USD (left) vs. US dollar strength (DXY). Source: TradingView

Despite the gains on Wednesday, gold prices are down 12% in two months, while the US dollar strength (DXY) nears its highest mark in one year. This vote of confidence in the US economy partly stems from AI sector strength, evident in the 25% gains in the Nasdaq 100 index. However, some specific tech sub-sectors have recently signaled weakness, which could act as a catalyst for Bitcoin and gold.

Could the AI sector cool off act as a catalyst for Bitcoin?

Micron (MU US) and SanDisk (SNDK US) shares saw intraday losses exceeding 9% on Wednesday after competitors SK Hynix (000660 KR) and Samsung (005930 KR) announced plans to expand capacity. Still, the move can hardly be deemed a trend reversal as the iShares SOX Semiconductor Index ETF (SOXX US) gained 78% in three months.

Continued outflows from US-listed spot Bitcoin exchange-traded funds (ETFs) have shattered bulls’ hopes, reinforcing a negative price spiral as negative news gets amplified while positive events barely register. 

US-listed spot Bitcoin ETFs daily net flows, USD. Source: SoSoValue

Regardless of the rationale behind the sales, Bitcoin’s weakness, 53% below its all-time high, does not inspire confidence in the $60,000 support level.

Strategy (MSTR US) increased its cash position to restore a healthy 17 months of dividend coverage on Monday. However, Strategy’s variable-rate Stretch preferred stock (STRC US) continued to trade far from the $100 target required for additional issuances. The STRC dividend rose to 12% from 11.5%, which was apparently not enough to entice more buyers.

Related: Bitcoin just $5K away from ‘best investment opportunity’ of bear market

Bitcoin might have temporarily benefited from Fed Chair Warsh’s concerns about persistent inflation, but rising expectations for higher interest rates and strong earnings momentum in the AI sector may continue to exert negative pressure on Bitcoin. As a result, a sustainable rally to $65,000 could take longer.