Could Fed Pessimism Send Bitcoin Below $80,000?

The Fed’s new stance, namely lower-than-expected rate cuts, has spooked the markets. Bitcoin (BTC) is no exception. He gave up some of his gains after a meteoric rise of more than 150% this year. There are many reasons to celebrate as we approach 2025: a favorable government position, growing institutional interest and, of course, momentum (read Buy, sell or hold Bitcoin). A price tag of $150,000 is not out of reach. But as is historically evident, the risk of an interim correction remains and has become more palpable after the Fed’s recent announcement.

This was clearly felt on the markets with a drop in the NASDAQ of -3.5%, and may weigh on risky assets like Bitcoin in the short term. The risk for this cryptocurrency is further amplified by increasingly leveraged positions, a lack of intrinsic value, and a susceptibility to market manipulation due to limited supply. A 20% correction from current levels is not ruled out. Bitcoin has substantial upside potential, but it carries its share of risks. If you want benefits with a smoother journey than crypto, consider it High quality wallet, which has outperformed the S&P and recorded returns in excess of 91% since its inception.

Leveraged Positions and History of Panic Crashes

Bitcoin positions are heavily leveraged, which amplifies its price volatility. When things go wrong, leveraged positions are usually liquidated first to reduce losses, causing a cascading effect. Recently, Bitcoin positions worth over $2 billion were liquidated in one day, causing prices to drop 6%. Covid was another reminder of the negative side of leverage as the price of Bitcoin collapsed by around 50% at the start of the pandemic. The estimated leverage ratio, which reflects the average leverage used by traders, increased by 37% between February and October 2024. Open interest in Bitcoin futures reached an all-time high of $63 billion in November 2024.

Leverage is a double-edged sword that significantly increases the downside risk of an asset and there is enough historical evidence to prove this. Between December 2017 and 2018, Bitcoin’s leverage amplified its crash at the end of the bull market, leading to an 80% price drop. In 2020, as COVID hit global markets, including cryptocurrencies, the sharp decline in the price of Bitcoin forced a sharp liquidation of leveraged positions, as much as $1 billion per day. About a year later, China’s crackdown on Bitcoin mining triggered another price decline. In November 2022, another crash was triggered by the liquidity crises linked to the insolvency of Almeda Research and FTX.

The added selling pressure on leveraged positions hinders investors’ ability to weather bear market periods. Liquidation of such positions often triggers a cascading effect leading to a price crash. As amazing as cryptocurrencies have been in terms of returns over the years, consistently beating the broader markets – in good times and bad, is a difficult task. On the other hand, the Trefis High quality walletwith a collection of 30 titles, has has outperformed the S&P 500 every year over the same period. Why then? As a group, stocks in the HQ portfolio have generated better returns with less risk relative to the benchmark; less of a roller coaster ride, as evidenced by HQ Portfolio Performance Metrics.

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