Bitcoin's Recent Downturn: An Analysis

End of Bitcoin's Range Play Above $90K

The prolonged sideways movement of Bitcoin (BTC) above $90,000 has taken a bearish turn this week, with a significant drop of 12.6%. This decline, which occurred during the first three days of the week (based on UTC hours), is the most substantial since the FTX bankruptcy in November 2022, according to TradingView data.

Reasons Behind the Sell-Off

The sell-off aligns with CoinDesk's earlier analysis, which highlighted investor dissatisfaction due to the lack of swift action from President Donald Trump's administration in establishing a national BTC reserve and tightening fiat liquidity conditions.

Institutional demand for Bitcoin and its second-largest counterpart, Ether (ETH), has waned, pushing the CME futures market towards backwardation. This market situation arises when spot prices are higher than futures prices.

Moreover, the Nasdaq index, a leading indicator of Wall Street's tech sector, has also experienced pressure, further contributing to Bitcoin's decline.

Future Outlook and Potential Challenges

The path ahead appears to be fraught with downside risks, as the deadline for tariffs against Canada and Mexico, set for March 4, draws near. The initial tariff announcements earlier this month led to a widespread risk-off sentiment.

Market participants who are optimistic about Friday's U.S. "core" Personal Consumption Expenditures (PCE) index may be in for a disappointment. The core PCE, the Fed's preferred inflation measure, is expected to have risen 2.6% year-on-year in January, down from December's 2.8%, according to consensus estimates quoted by Morningstar.

However, markets might overlook the anticipated soft reading and instead focus on the ongoing increase in forward-looking inflation metrics. For instance, the Conference Board's consumer confidence for February revealed a surge in one-year inflation expectations to 6% from 5.2%. The two- and five-year inflation swaps have also been on the rise, as CoinDesk noted earlier this month.

Bitcoin's Potential Resilience

Despite the prevailing macro-driven negative sentiment, Bitcoin could soon regain its footing, thanks to its dual role as a risk asset and a safe haven akin to digital gold.

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The downside break of the extended range play, as seen in BTC, usually results in a substantial drop, equivalent to the range's breadth. In other words, the downside break of the $90K-$110K range indicates a potential slide to $70,000.

In the worst-case scenario, Bitcoin could decline to the $72,000-$74,000 range, where a likely rebound will occur, according to Markus Thielen, founder of 10x Research, who noted Bitcoin's lagged correlation to the global central bank liquidity indicator.

As of press time, BTC has rebounded to $86,000, having tested a presumed demand zone around $82,000, as suggested by Markus Thielen in Wednesday's client note.

Possible Regulatory Clarity

Some analysts are optimistic that regulatory clarity following Wednesday's Senate Committee hearing on "Exploring a Bipartisan Legislative Framework for Digital Assets" could bolster market valuations.

"A clear regulatory framework may be exactly what the market needs for institutions to confidently enter the space, unlocking the next wave of capital inflows. If the U.S. provides definitive guidance on stablecoins and broader digital asset regulations, we could see significant institutional allocation into the space," Matt Mena, crypto research strategist at 21Shares, said in an email.

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