Is Bitcoin’s 3% Drop Signaling a Return of Market Risks

Ethereum Flirts With $4,000 As Bitcoin Correction Continues

Bitcoin bulls so far this year have had a respite from having to pay attention to things like the economy and Federal Reserve monetary policy thanks to the overwhelming demand for the crypto from the new spot ETFs. For the moment, at least, that appears to be changing.

Thursday morning’s Producer Price Index (PPI) for February was yet another data point that perky inflation is proving far stickier than most expected. The government report said PPI was higher by 0.6% last month, doubling the pace in January and also double economist forecasts. The so-called core PPI, which excludes food and energy costs, rose 0.3% in February, a slowdown from 0.5% in January, but ahead of forecasts for 0.2%.

Earlier this week, the Consumer Price Index (CPI) also came in faster than anticipated, with inflation ticking up to 3.2% annually and the core rate rising to 3.8%.

Previously flirting with dipping below the 4% level earlier this month, the 10-year Treasury yield has new risen to 4.30%. Alongside, the U.S. dollar has broken out a downtrend begun in mid-February to rise about 1% over the past week, including a 0.5% rise on Thursday. All things being equal, higher rates and a rising dollar tend to be a negative for risk assets like bitcoin (BTC).

Expectations for far easier monetary policy in 2024 continue to be whittled back. Markets had come into the year anticipating as much as 150 basis points in Fed rate cuts in 2024, with the initial cut to come at next week’s Federal Open Market Committee meeting. At this point, no one longer expects that, nor is a cut expected at the May meeting. As for June, the odds of lower rates have fallen to roughly 50%, according to the CME FedWatch Tool.

After about a 70% rise in 2024 to a new record high just shy of $74,000, bitcoin was surely vulnerable to a correction and it could be that the inflation, interest rate and dollar news has given traders an excuse to lighten up. After touching $73,800 earlier Thursday morning, bitcoin slid to as low as $70,650 after the economic data. At press time it was trading at $70,900 down more than 3% over the past 24 hours. The broader CoinDesk 20 Index was lower by just 1.7%, with gains in Solana and Dogecoin helping that gauge’s outperformance.

As bitcoin continues to experience a correction, Ethereum is flirting with $4,000, marking a significant milestone for the second-largest cryptocurrency by market capitalization. The surge in Ethereum’s price has been driven by the increasing demand for decentralized finance (DeFi) applications and the announcement of a possible Ethereum exchange-traded fund (ETF).

However, while bitcoin’s bull run has been largely uninterrupted by economic and monetary policy news, it seems that Ethereum may not be immune. Recent data points, such as the Producer Price Index and Consumer Price Index, suggest that inflation may be rising faster than expected. This has caused the 10-year Treasury yield to rise, along with the U.S. dollar, which can negatively impact risk assets like bitcoin.

Furthermore, expectations for easier monetary policy in the future have been scaled back, with the odds of rate cuts in 2024 falling to around 50%. This could also have an effect on the crypto market, potentially leading to a correction like the one currently being experienced by bitcoin.

After reaching a new record high of $74,000, bitcoin experienced a sharp decline following the economic data. While it is currently trading at $70,900, down more than 3% in the past 24 hours, it is worth noting that the broader CoinDesk 20 Index has only seen a 1.7% decline. This is thanks to gains in other cryptocurrencies like Solana and Dogecoin, which have helped to outperform bitcoin.

Overall, while the surge in Ethereum’s price is certainly impressive, it will be interesting to see how it holds up in the face of potential economic and monetary challenges. For now, all eyes are on bitcoin’s correction and whether it will continue.