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Crypto hedge fund gives real reason for Bitcoin’s drop — Iran is just the ‘spark’

Crypto hedge fund gives real reason for Bitcoin’s drop — Iran is just the ‘spark’
Snapshot
The flag of the Islamic Republic of Iran next to the Palestinian flag at a demonstration in Rome on April 13. Credit: Mauro Scrobogna/LaPresse/Shutterstock
By
Thomas Carreras
  • Long duration Treasury bills signal that liquidity conditions are tightening.
  • That’s why Bitcoin is stumbling.
  • It’s not because of fears over a conflict in the Middle East, says crypto hedge fund Lekker Capital.

All eyes are on the Middle East, but the Federal Reserve may bear more responsibility for the crypto dump than Iran and Israel.

Bitcoin dropped 14% at the end of last week and is currently at about $62,000. The crypto market experienced more than $1.5 billion in liquidations over the weekend, one of the largest washouts since 2022, according to crypto market-maker Wintermute.

“Most people are falsely attributing all of this price action to the Israel-Iran conflict,” Quinn Thompson, founder of crypto hedge fund Lekker Capital, told DL News. “It may be a spark, but it’s not the tinder for the burn.”

Bonds, bonds, bonds

Higher than expected economic growth, inflation, and inflation volatility are pushing the Fed to keep federal funding rates between 5% to 5.25% — instead of proceeding to rate cuts as previously anticipated.

This means that short duration bills are still attractive, since they offer a way for investors to earn high interest while taking little risk.

That means demand for longer duration bills is falling off in response. The cheaper these bonds become, the higher their yields go. The 10-year Treasury yields have been rising sharply since March, and on Tuesday, they touched 4.7% for the first time in five months.

The pressure on long-duration bonds has a “tightening effect on financial conditions,” Thompson said. “This is bad for Bitcoin because it implies less liquidity.”

Thompson has told DL News that a tightening liquidity environment could end up triggering a crisis similar to the US regional bank collapse last spring.

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These concerns reduce the number of risky investments, like Bitcoin and other cryptocurrencies, that fund managers are willing to take.

‘Tip of the spear’

“We need to see how governments and policy makers respond” to know what happens next, Thompson said.

The next Federal Open Market Committee and Quarterly Refunding Announcement — events organised by the Fed and Treasury Department to communicate policy — are scheduled for May 1.

“Bitcoin trades at the tip of the spear for liquidity conditions,” Thompson said, meaning that it reacts quicker to changing liquidity conditions than equities.

That would explain why Bitcoin has stalled for the last month, while major indexes like the S&P 500, Nasdaq and Dow Jones have only started sliding in the last two weeks, he said.

Crypto market movers

  • Bitcoin has fallen about 2.2% today to reach 62,344.
  • Ethereum has declined 1.9% to $3,026.

What we’re reading

Tom Carreras is a markets correspondent at DL News. Got a tip about Bitcoin and bonds? Reach out at tcarreras@dlnews.com