Bitcoin's mid-May slide from $58,000 to $30,000 happened after official data released on 12 May showed the U.S CPI at an all-time high and triggered taper fears The sell-off also coincided with China's currency ban on cryptocurrencies and concerns regarding the negative environmental impact of crypto mining.
Inflation remains the key as usual specifically when base effects will end CPI prints begin to reflect the true year-on-year picture for the Fed, QCP Capital said in its Telegram channel. Arguably, the worst of the base effects have now run its course as seen in the chart below If inflation still remains above 5% and from here the hawks will surely start expressing worry. Several Fed members have already turned hawkish, signaling a willingness to begin scaling back asset purchases or tapering this year. Some observers are concerned that a possible taper would lead to a substantial drop in the dollar liquidity in the fourth quarter, and could coincide with the U.S. Treasury issuance of more bonds to restore its coffers to the Treasury General Account, or TGA after the debt ceiling was lifted
According to the Wall Street Journal, the United States government could run out of cash and hit the debt ceiling between mid-October and mid-November. The Fed is expected to taper around the same time.
The U.S. Treasury will likely quickly rebuild the cash balance after the TGA debt ceiling suspension as the new equilibrium level of the TGA looks to be around USD 800 bn. This is a net liquidity withdrawal of almost USD 600 bn compared to the current scenario, which cannot be seen as good news for risk appetite, analysts at Nordea Bank said in the weekly research note published on Friday.
Bitcoin and other traditional market risk assets have soared in the past 18 months thanks to the liquidity deluge brought on by the Fed stimulus program, and so a liquidity squeeze due to a Fed taper and U.S. Treasury actions could weigh on asset prices in general, and particularly on bitcoin because capital in crypto markets is mercenary and tends to overreact according to Messari s Mira Christanto.