Bitcoin fell sharply in early trading on Tuesday as new U.S. economic data pushed the dollar to its highest level in more than four months.
The flagship cryptocurrency has fallen more than 4% in the past 24 hours to $65,174. The decline pushed Bitcoin prices below last week’s stable range of $68,000 to $72,000.
The impact of the US dollar trend on the crypto market
The dollar index, a measure of the greenback's strength against a basket of major currencies, breached the 105 mark for the first time since mid-November, boosted by an unexpected rise in the ISM manufacturing purchasing managers' index for March.
The report showed the first increase in factory activity since September 2022, rising 2.5 points to 50.3 from 47.8 in February. The development marks the end of 16 months of contraction and challenges the possibility of an imminent Federal Reserve rate cut. Key indicators such as new orders also returned to growth, and the price index rose from 52.5% to 55.8%.
Following this report, market expectations for a Fed rate cut have adjusted, with swaps now predicting less than 65 basis points of cuts this year, lower than previously expected, according to Bloomberg data. In short, this reduces the probability of a Fed rate cut in June to below 50%.
Typically, a stronger dollar makes dollar-denominated assets, such as Bitcoin and gold, more expensive and less attractive, potentially reducing demand. In addition, a persistently strong dollar could lead to global financial tightening, reducing investors’ appetite for risky assets.
“This (dollar) strength is an extension of the move late last week when Federal Reserve Chairman Christopher Waller delivered a less-dovish speech,” said Chris Turner, global head of markets at ING.
Bitcoin price drop triggers overall market decline
The significant decline in the price of Bitcoin has also extended to crypto altcoins, with coins such as Ethereum, Solana and Dogecoin suffering more pronounced losses.
Ken Timsit, managing director of Cronos (TSX:CRON) Labs, told Investing.com: “I’m not surprised because we are approaching the Bitcoin halving at the end of April and the Bitcoin ETF (TSX:EBIT ) was approved in January of this year, volatility increased significantly."
Specifically, Ethereum and Cardano’s ADA each fell by more than 5% in the past 24 hours, while Solana’s SOL and Dogecoin plummeted by more than 7.8% and more than 10% respectively.
The broader crypto market faced a massive amount of liquidations, with over $400 million in long positions being liquidated, compared to just $85 million in short positions.
“There is a lot of automated trading and derivatives involved, which could trigger a large, temporary sell-off. However, the outlook for cryptocurrency adoption remains positive,” Tinsit added.
Total crypto market capitalization fell about 5.3% to $2.62 trillion during the same period, according to Coingecko.
Crypto experts attribute the pullback to profit-taking by holders
Kristian Haralampiev, head of structured products at Nexo, told Investing.com that today’s pullback is likely the result of profit-taking by holders.
“Profiting at the top of the market has to be one of every investor’s goals,” he said.
Citing data from Glassnode, Kharalanpiev noted that on-chain metrics show “increased volume from holders to exchanges, while a specific group — short-term holders at profit — appear to be the most active.”
“While the pullback may contradict the widespread expectation that Bitcoin will simply break out to new all-time highs, it is also an excellent entry opportunity for late-stage longs ahead of the Bitcoin halving.”
Still, Kharalanpiev did not rule out the possibility of further declines in Bitcoin prices.
“Looking ahead, the call/put ratio is tilting further towards the bearish side, suggesting the options market is open to the concept of further pullbacks,” he concluded.