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Bitcoin Plunges on Profit Taking Before Fed

Bitcoin suffers the largest daily drop since November as the Fed meeting looms. Bitcoin sees the most long liquidations of 2023.

January 31, 2023 - Bitcoin price was declining in the last 24h following a large drop on Monday. After almost testing the US$24k price level, the main cryptocurrency fell to mid-US$22k with US$46mn of long Bitcoin positions being liquidated in a single day. In our view, this price action seems to be a profit taking before the Fed’s interest rate decision tomorrow and the monthly close.

In a busy week, not only the Fed will decide on interest rates on Wednesday, but the European Central Bank (ECB) and Bank of England (BoE) will also adjust their rates on Thursday. The big event is the Fed’s move, which is expected to be a hike of 25 bps. The derivatives markets suggest that the market expects further tightening, before cuts later in the year. Investors also expect the ECB and BoE to raise their interest rates by 50 bps each on Thursday. We see the Fed cutting rates by 25 bps, but there are some market participants betting on a 50 bps cut due to inflation concerns, despite the promising numbers from Dec. If the Fed disappoints the market expectation, we would expect a sell-off of risk assets, including cryptocurrencies.

The expectations of an interest rate hiking deceleration made January the Bitcoin’s best-performing month since October 2021, according to Glassnode. The current rally was fuelled by both historic spot demand and a sequence of short squeezes, the on-chain research firm noted in its weekly report. It also reported stabilization in exchange flows following the FTX collapse and large withdrawals from centralized exchanges. We view this movement as an indication that the market has overcome the worst events from last year, setting new expectations for 2023.

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