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The Evolving Crypto Ecosystem
Bitcoin’s (BTC) market capitalisation currently stands at an eye-popping USD 1.25 trillion.
Having reached an all-time high of USD 73,845 in March 2024, BTC recently pulled back against the US dollar (USD) and has hovered around the USD 60,000 mark over the past few days. Like most traditional currencies and assets, the world’s most popular crypto pairing, BTC/USD, is affected by various time-sensitive, internal and external factors.
Whether you are an investor or just crypto-curious, here are five things you need to watch this month regarding BTC/USD.
The latest BTC Halving event took place in April this year. Halving is when the reward for the number of Bitcoin miners generated in each block is cut in half to ensure the coin’s scarcity and deflationary nature. During this event, the block reward for Bitcoin miners was reduced to 3.125 BTC per mined block from 6.25 BTC. As the rate at which new coins enter the market decreases by 50% during Halving, Bitcoin becomes scarcer, usually placing upward pressure on its price.
BTC’s value has a proven track record of rallying after Halving events, often leading to increased attention and investment. After the first Halving in November 2012, Bitcoin’s price increased from just USD 11 to USD 1,100 in a year. Following the second event in July 2016, BTC increased to around USD 20,000 by December of the next year, from approximately USD 650. A new high of USD 69,000 was reached in 2021 following the third Halving of 2020.
Every Halving event should be treated as a unique scenario given the real-time market context in which it occurs, as well as the cryptocurrency’s volatile nature and susceptibility to various external factors. This year’s Halving impact on BTC’s price has yet to fully materialise, making this one to watch over the medium term.
Although Bitcoin Halving events are thought to counteract inflation by maintaining the coin’s scarcity, the digital asset does not exist in isolation. Bitcoin is part of the broader global financial system, which means that factors affecting all currencies and assets – such as economic growth/contraction, geopolitical events and investor sentiment – also impact the cryptocurrency’s value.
One of the most highly anticipated releases for investors is the US Consumer Price Index (CPI), a monthly inflation metric which assesses consumers’ purchasing power. The latest data out of the US indicated that CPI increased by +3.5% on a year-on-year basis in March 2024, following a +3.2% rise in February, reflecting a decrease in the purchasing power of the USD. Crucially, an elevated CPI reading can mean eventual involvement from the US Federal Reserve (Fed) through monetary policy, i.e., interest rates will be increased or maintained in restrictive territory to help manage inflation.
What does this mean for BTC? Aaron Hill, Analyst at FP Markets, says, ‘High inflation readings, coupled with the present expectation that the Fed will maintain the current Fed funds target range, usually reinforce the USD’s value and can negatively weigh on BTC’.
The impact of inflation on BTC/USD is also determined by speculative trading and market sentiment. If investors believe that inflation has the capacity to drive BTC’s value up, they may buy, pushing the price upwards. On the other hand, if the market does not perceive Bitcoin as a hedge against rising inflation, for example, the impact on BTC’s price might be negative.
Take note that the next US CPI announcement will take place on 15 May.
As already mentioned, most central banks tighten their monetary policy by increasing interest rates to counter rising inflation. The Fed is no exception.
After its latest meeting on 1 May, the Fed announced that interest rates would remain unchanged at 5.25%- 5.50%, given sticky inflationary pressures. Although Fed Chairman Jerome Powell hinted that a rate cut is on the table this year, the path forward remains uncertain. Mirroring the drops in the S&P 500 and Nasdaq on the day of the announcement, BTC’s price was also under pressure, falling by more than 4% to USD 57,000.
Higher interest rates usually strengthen the currency in question – in this case, the USD – potentially making BTC less attractive than the fiat currency. However, there is also the possibility that investors turn to Bitcoin as an alternative investment if the Fed’s actions are perceived as too aggressive or insufficient.
Given their decentralised nature, cryptocurrencies have often been synonymous with lack of regulation; however, this is starting to change – and rapidly.
In the US, although the Securities Exchange Commission (SEC) remains sceptical about crypto assets and their usage in illicit activity, we are starting to see clearer rules, paving the way for increased institutional investment. On the other hand, recent SEC warnings undermining the validity of cryptocurrencies, as well as legal action taken against crypto exchanges and prominent crypto investors, can cause market uncertainty and volatility as investors retreat out of fear of potential losses.
In the UK, the Financial Conduct Authority (FCA) requires any company offering digital currencies to be authorised by the body and comply with its rules. The introduction of stablecoins is also gaining traction. If stablecoins are introduced and regulated, we can expect both a positive and negative impact on Bitcoin. Strict stablecoin regulation, together with negative sentiment, may push investors back into the Bitcoin arena, causing its price to spike. On the other hand, investors may turn to dollar-pegged stablecoins as a way to diversify their portfolios away from high volatility assets such as BTC.
The EU appears to have adopted a more crypto-friendly stance with the introduction of the Markets in Crypto-Assets regulation (MiCa) regime, a comprehensive regulatory framework to govern digital assets such as Bitcoin. The EU hopes to harness the potential benefits of digital finance while mitigating risks for investors and maintaining financial stability.
Asian regulation also has a significant impact on the crypto ecosystem, given the region’s large number of investors, exchanges, miners and developers. In Japan, although rules have toughened in an attempt to tackle money laundering, given that cryptocurrencies are treated as a legal means of payment, there is growing institutional adoption and investment, positively impacting Bitcoin’s value. On the contrary, China continues to have bans in place on exchanges, trading and crypto mining, often affecting Bitcoin’s short-term trading volume and mining capacity, thereby causing price fluctuations.
It is generally accepted that regulations that improve Bitcoin's security and reliability can enhance investor confidence, potentially increasing demand and price. Conversely, more stringent rules and regulatory crackdowns could restrain innovation and restrict market access. Hill argues that ‘If regulators can strike a healthy balance between the need for innovation and protecting investors, the cryptocurrency market is set to benefit’.
Given the ever-changing global regulatory environment, BTC investors are urged to stay on top of updates as cryptos are known to react strongly to such news.
Despite the SEC’s crackdown on crypto, the Commission approved the sale of spot Bitcoin Exchange-Traded Funds (ETFs) in January this year. Wall Street giants BlackRock and Fidelity have already raked in USD 15 billion and USD 9 billion, respectively, through the issuance of Bitcoin ETFs.
The SEC is also expected to rule on spot Ethereum (ETH) ETFs on 23 May. Widely considered another step forward in the cryptoisation process, regulation and approval translate into further investor protection and the asset's inclusion in mainstream finance.
The London Stock Exchange’s (LSE) decision to start accepting Bitcoin and Ethereum Exchange-Traded Note (ETN) applications further solidifies the growing acceptance of cryptocurrencies in traditional finance. Crypto ETNs are expected to be rolled out on 28 May in the UK.
FP Markets’ Analyst Aaron Hill argues that ‘ETFs and ETNs are set to be the game-changers. Bitcoin and altcoins are gaining visibility and legitimacy – two variables which can directly affect liquidity and price stability. On top of that, approval by regulatory bodies like the SEC and listings on global exchanges can boost investor confidence and participation, leading to expectations of an upcoming positive trend in Bitcoin’s price’.
Despite Bitcoin's growing acceptance – underpinned by ongoing regulatory breakthroughs and wider adoption of the digital currency – various macroeconomic factors and the recent Halving event demonstrate that investors must implement rigorous daily monitoring of market developments to establish and execute a successful long-term investment strategy.
1. Which major economic data events can affect BTC’s Price?
All major economic indicators, such as GDP, Inflation, Interest Rates and Unemployment, can impact BTC’s price. With FP Markets Economic Calendar, you can monitor all major releases before conducting a trade.
2. Where can I Trade BTC/USD?
You can trade BTC/USD CFDs (Contracts for Difference) on MetaTrader 4 (MT4), MetaTrader 5 (MT5) and cTrader with FP Markets, a fully regulated broker.
FP Markets also offers Cryptocurrency CFD trading in Litecoin (LTC), Ripple (XRP), Ethereum and Bitcoin Cash (BCH).
3. What are the Benefits of Crypto CFDs?
Trading Crypto CFDs offers several benefits: yYou do not own the underlying asset and simply trade based on its price movement; you do not need a Crypto wallet, and, most importantly, you can trade in rising and falling prices.
Access 10,000+ financial instruments Auto open & close positions News & economic calendar Technical indicators & charts Many more tools included
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