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Bitcoin (BTC) temporarily lost, then recovered above, the $29,000 support level in European trading hours on Thursday, setting the tone for other major cryptocurrencies, data showed.
The price dip followed a relatively positive market response to Wednesday's release of minutes of the U.S. Federal Reserve meeting held on May 3-4. The S&P 500 added nearly 1% and the tech-heavy Nasdaq ended the day 1.91% higher. In Europe, the Stoxx 600 and Germany’s DAX both gained about 0.4% on Thursday.
The minutes showed the agency was willing to be flexible on plans to increase rates and tighten monetary policy. Previously, Chair Jerome Powell said the Fed would take an “aggressive” stance – which traders feared would lead to inflation.
The Fed raised the official U.S. interest rate by half a percentage point earlier in May. It plans to reduce the size of its balance sheet by $47.5 billion a month for three months and up to $95 billion a month starting in September, as previously reported.
“Inflation is much too high, and we understand the hardship it is causing,” Powell said at the time. “We’re moving expeditiously to bring it back down.” At the time, the comments contributed to a fall in broader markets and spread to crypto.
U.S. inflation has surged to its highest in four decades and is closely tracked by bitcoin (BTC) traders because the asset seen by many as a hedge against rising consumer prices.
Bitcoin, however, remains bearish. It has lost value for each of the the past eight weeks – a first in its history – while futures and options data indicate traders are positioning for a further drop.
An indicator tracking portfolio hedge reached a 12-month high this week, while yields on a popular trade involving bitcoin and ether (ETH) fell to lows.
Expect volatility ahead
Some analysts say bitcoin’s current range between $29,000 to $30,000 could be breached in coming weeks and the asset could become more volatile.
“We caution that this current reduction in volatility risks turning into an explosion in the near term, potentially setting off momentum for a few days or weeks,” said Alex Kuptsikevich, a market analyst at FxPro, in an email to CoinDesk.
“A formal break of consolidation beyond the previous local extremes, which are located at $30,200 and $29,300, in a sharp move would trigger a wave of liquidation of positions,” Kuptsikevich said. Liquidations typically cause sudden movement of prices as traders cover their positions to protect against losses.
Other observers say the range is part of consolidation in the broader market.
“Following the crypto industry-wide sell-off with the demise of the LUNA network last week, markets have entered a period of consolidation,” said Will Hamilton, a trader at crypto fund Trovio, in a note to CoinDesk.
“Rotation has continued within the stablecoin market as a further $1Bn in USDT redemptions has been absorbed by USDC and BUSD,” Hamilton said, suggesting traders are not entirely exiting the crypto market.