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Bitcoin (BTC) faced selling pressure in the week ended Sunday as bond yields rose and the U.S. dollar liquidity declined.
The leading cryptocurrency by market value fell by 9% to $27,600, registering its largest single-week percentage loss since early November, according to data from TradingView and CoinDesk. The yield on the 10-year U.S. Treasury note rose by six basis points to 3.58%, its second-straight weekly gain, denting the appeal of risky assets, including cryptocurrencies.
The USD Liquidity Conditions Index, an indicator tracking the greenback's supply in the monetary system, slipped to $6.13 trillion, reaching its lowest point in over a month, according to data source TradingView. Besides, traders priced in a higher probability of the Federal Reserve continuing its tightening cycle with a 25 basis point rate hike in May.
Since 2021, bitcoin and the wider crypto market have closely tracked local peaks and troughs in the dollar liquidity index. Bitcoin rose to $28,000 in the first half of March as the Fed opened liquidity taps to contain the banking crisis, pushing the dollar liquidity index higher to $6.35 trillion from $5.82 trillion.
But the situation has changed.
"In the absence of encouraging signs on the monetary liquidity front, BTC continued to drift down over the week after its sharp drop on Monday, dragging other large-cap crypto assets with it," Noelle Acheson, the author of Crypto Is Macro Now wrote in the weekend edition of the newsletter.
"BTC – while being an 'insurance' asset that should outperform when other asset groups are suffering – is still heavily impacted by the overall macro mood, which will largely be driven by monetary liquidity expectations," Acheson added.
According to Dessislava Laneva, a macro analyst at Paris-based crypto data provider Kaiko, bitcoin and the financial markets in general,may see increased price turbulence in the near term, thanks to the U.S. debt ceiling issue.
The U.S. government reached its statutory debt limit – the self-imposed cap on borrowing – of $31.4 trillion in January, forcing the Treasury to implement extraordinary measures to help the government meet its obligations for at least five months. These measures also boosted the dollar liquidity and kept risky assets bid.
Since then, the debt-ceiling negotiations have been in a deadlock. Last week, one-year credit default swaps, which measure the cost of insuring against government default in the next 12 months, rose to a record high, according to the Wall Street Journal.