Bitcoin (BTC) slumped over 5% on Thursday, erasing all of its recent gains as investors braced for more policy tightening by the Federal Reserve.
The token slumped over 5% in the past 24 hours to $29,867, after rising as high as $32,000 in the past few days.
The fall was triggered by the U.S. Federal Reserve, which began officially shrinking its $8.9 trillion balance sheet on Wednesday, in a bid to curb inflation. The move caused losses across most risk-driven assets.
Equity markets also tumbled during Wednesday’s session, with the Nasdaq 100- BTC’s closest stock parallel- losing 0.7%.
Further denting sentiment, U.S. Treasury Secretary Janet Yellen admitted this week that she was “wrong” on inflation being transitory.
BTC wilts as Fed fears kick in
The Fed began reducing its balance sheet at a rate of $47.5 billion a month, as announced during its May 4 meeting. The move is bearish for BTC given that it points to lower liquidity conditions in the market, meaning less potential inflows to the token.
Balance sheet reduction is used by the Fed when other measures, such as interest rate hikes, fail to control inflation. The use of such a measure now also indicates the high amount of economic risk posed by inflation.
Data from CME Group now shows that over 99% of investors now expect the Fed to hike by at least 50 to 75 basis points in its June meeting- pointing towards more pressure on BTC.
The token slumped as much as 40% after the Fed raised interest rates, and as April inflation data came in hot. With inflation showing few signs of cooling, the Fed is likely to keep monetary policy tight this year.
Long positions obliterated by recent tumble
Traders expecting BTC to rise further after its relief rally were blindsided by Thursday’s tumble.
Data from Coinglass shows nearly $154 million BTC positions were liquidated in the past 24 hours, 89% of which were long positions.
The broader crypto market also saw a slew of liquidations, as prices plummeted. Analysts are now positioning for more weakness in markets this month.
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