Does bitcoin slump suggest trouble ahead in global markets?

Crypto 'canary' may signal future shocks.

Bitcoin’s tumble is piquing the interest of investors who view pronounced swings in the digital token as a possible precursor for broader changes in risk appetite in global markets.

The cryptocurrency has shed about 4% in the past two days following a near 16% plunge in April, the worst monthly drop since Sam Bankman-Fried’s FTX digital-asset empire imploded in November 2022. The token changed hands at $57,462 as of 7:24 a.m. Thursday in London, around a two-month low.

Some investors scour Bitcoin inflexions for clues about shifting liquidity dynamics that can buffet other assets. The token slid in the past few weeks as the Federal Reserve signaled interest rates will stay higher for longer, a mantra that tightened financial conditions by boosting Treasury yields and the dollar.

“Bitcoin is our favorite canary,” ByteTree Asset Management Chief Investment Officer Charlie Morris wrote in a note. “It is warning of trouble ahead in financial markets, but we can be confident it’ll bounce back at some point.”

The largest digital asset hit a record high of almost $74,000 in mid-March, buoyed by a flood of inflows into debut US spot-Bitcoin exchange-traded funds from the likes of BlackRock Inc. and Fidelity Investments.

The demand for the products subsequently fizzled, and markets failed to get a tailwind from this week’s launch of spot-Bitcoin and Ether ETFs in Hong Kong.

Discounts to net asset value for some of the US portfolios have notably widened, highlighting the challenges from Bitcoin volatility. On Wednesday, the group of US spot ETFs suffered its largest daily net outflow on record.

MACRO FORCES

Bitcoin posted four April declines over the past decade, three of which presaged May losses that averaged 18%, according to data compiled by Bloomberg.

Still, if inflation pressures relent and markets revive bets on a much looser Fed stance, crypto and other speculative investments could find some relief.

Fed Chair Jerome Powell kept alive hopes for a rate reduction this year after the central bank concluded its latest meeting Wednesday. But he also acknowledged that a burst of inflation has eroded confidence that price pressures are ebbing.

“The next three to four months will be less bullish and more risk-oriented, with the market closely monitoring inflation, employment and economic data for any unexpected shocks or to gain confidence about potential rate cuts,” said Youwei Yang, chief economist and vice president of crypto miner BIT Mining Ltd.