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The sell-off in the Bitcoin market, in particular, has been exacerbated by overly leveraged optimistic bets.
On Wednesday, Bitcoin (BTC) and spot gold remained below critical psychological levels as a higher US dollar weighed on investors’ demand for hedging assets.
The Bitcoin/USD exchange rate fell 5.27 percent to an intraday low of $44,423, but regained some of those losses after reclaiming the $45,000–46,000 region as support. The pair’s recovery also extended its ongoing recovery from $42,830, a level it touched on Tuesday after plunging by more than 18% during the session.
Bitcoin’s massive sell-off coincided with a strikingly similar but dwarfed decline in the rivaling gold market. In detail, the precious metal suffered its worst daily drop in a month on Tuesday as spot XAU/USD rates fell below $1,800 following a minus 1.37% intraday move.
Between 10:00 and 11:00 UTC, a huge red hourly candle developed on gold and Bitcoin charts. In contrast to Bitcoin, which extended its downturn, the precious metal consolidated sideways after the massive drop.
In particular, the cryptocurrency collapsed under the weight of overly leveraged optimistic bets. According to Bybt statistics, over $3.68 billion in longs in the Bitcoin options market were liquidated in the last 24 hours, making it the highest liquidation since June.
Automated liquidations caused additional selloffs in the Bitcoin market, as traders were forced to sell their BTC holdings to cover their margin calls.
Is the U.S. dollar responsible for the big drop?
Worth noting, the sudden drop in Bitcoin and gold prices coincided with a sharp spike in the U.S. dollar index (DXY).
The index, which measures the dollar’s strength against a basket of top national currencies, rose by 0.41% to 92.53 on Tuesday and continued climbing in the ongoing session to settle its intraday high at 92.73.
DXY recovered from a one-month low, aided by rising US Treasury yields ahead of this week’s government paper sale, which includes $58 billion in three-year notes, $38 billion in 10-year notes, and $24 billion in 30-year bonds.
The yield on the benchmark 10-year US Treasury note climbed to 1.377 percent on Tuesday, from approximately 1.32 percent after Friday’s disappointing non-farm payroll report. It was 1.351 percent at the time of writing.
Mixed outlook until Fed meeting
Rising yields generally fight with Bitcoin and gold for haven flows. Despite the recent increase, they remain below July’s core inflation of 5.4 percent, making non-yielding safe havens more appealing wagers against rising consumer prices.
However, with the Federal Reserve expecting to begin winding down its $120-billion-per-month asset-purchasing facility at the end of this year, some experts anticipate bond yields will continue to rise. As a result, they will provide a bullish backstop to the dollar.
Shaun Osborne, chief FX strategist at Scotiabank in Toronto, told CNBC:
“The Federal Reserve we think is still likely to move toward tapering by the end of this year, the U.S. economy is likely to perform relatively strongly, so our view is minor dollar dips, minor dollar weakness is probably a buying opportunity.”
Meanwhile, the rising COVID-19 Delta variant threatens to dampen recovery prospects. In turn, it could force the Fed to sustain its expensive bond-buying program, thus keeping a lid on yields and the dollar alike.
As a result, the outlook for Bitcoin and gold looks mixed. The Federal Open Market Committee’s meeting later this month expects to shed more light on the taper timeline.