What happened?
Bitcoin surged to about $124,000 on Thursday, reaching an all-time high, and market sentiment was extremely optimistic. However, the euphoric market only lasted for a few hours before significant negative news triggered a chain sell-off, causing prices to quickly fall below the $120,000 mark.
This sudden drop was mainly triggered by two major factors: on one hand, U.S. Treasury Secretary explicitly stated that the government will not purchase new bitcoins, directly breaking the market's optimistic expectations of a 'national-level super buyer'; on the other hand, higher-than-expected inflation data (PPI) reduced the likelihood of the Federal Reserve (Fed) lowering interest rates, leading to funds being withdrawn from risk assets like bitcoin.
Bitcoin plummeted after reaching new highs; reason: a statement from the White House + a report
Bitcoin (BTC) recently broke through all previous resistance, reaching a new peak of about $124,000. However, bitcoin did not maintain its new position for long; after reaching a historical high of around $124,457, the price quickly plummeted, breaking below the $120,000 mark and several key support levels, dipping down to around $117,400. As of the time of writing, the bitcoin price was around $119,303.
This fierce sell-off wave was mainly triggered by two major negative news: the policy remarks from the U.S. Treasury Secretary and a report on inflation data.
The first turning point in market sentiment came from U.S. Treasury Secretary Scott Bessent's remarks in an interview with Fox Business Channel. He explicitly stated that the U.S. government currently has no plans to expand its strategic bitcoin reserves through new purchases.
Bessent stated: 'We have begun to enter the 21st century and have established a bitcoin reserve. We will not purchase new bitcoins, but we will utilize confiscated assets to continue to enrich it.'
This statement extinguished the market's expectations that the U.S. government might become a super buyer of bitcoin. President Trump signed an executive order on March 6 this year, authorizing the Treasury to establish a national bitcoin reserve and allowing it to make additional purchases without 'increasing the taxpayer burden.'
However, Bessent's latest statements confirmed that, at least in the short term, the government will not actively buy bitcoin from the market. Nevertheless, Bessent also brought a glimmer of hope, confirming that the government will stop selling its existing bitcoin holdings.
'We will stop selling. I believe that at today's price, our bitcoin reserve is valued at about $15 billion to $20 billion.' This move echoes the 'digital Fort Knox' concept previously proposed by White House advisor David Sacks, which means using the nation's bitcoin holdings as a long-term store of value rather than a short-term liquid asset.
In simple terms, this sharp decline is a 'sell-off caused by unmet expectations.'
The market previously celebrated the dream that 'the U.S. government would become a major buyer of bitcoin,' pushing prices to new highs. However, Treasury Secretary Bessent directly punctured this dream, bringing the market back to reality. Although he also mentioned that 'selling existing bitcoins will stop' (which is a mild positive news that reduces market selling pressure), this positive news completely fails to offset the enormous disappointment brought by 'no longer purchasing,' leading to a sharp price drop.
Economic warning sign: Producer Price Index (PPI) unexpectedly surged
While policy news has shaken market confidence, a higher-than-expected U.S. economic data became the last straw that broke the camel's back.
The latest U.S. Producer Price Index (PPI) year-on-year growth rate reached 3.3%, far exceeding market expectations of 2.5% and the previous value of 2.3%, marking the largest monthly increase since June 2022.
This data stands in stark contrast to the Consumer Price Index (CPI) released this past Tuesday, suggesting that inflationary pressures remain stubborn and may force the Fed to delay rate cuts.
What is the Producer Price Index (PPI)?
The Producer Price Index is an economic indicator used to measure the average changes in prices received by domestic producers (manufacturers, farmers, miners, etc.) for their products and services.
In simple terms, it can be understood as the index of changes in 'factory prices' or 'wholesale prices.' It focuses on price changes of goods from the production side before entering the retail channel.
Since price changes usually propagate from the upstream (production side) to the downstream (consumption side) in the industry chain, the trend of PPI often leads the Consumer Price Index (CPI).
When PPI rises, it indicates that producers' costs have increased. To maintain profits, producers are likely to pass these increased costs onto wholesalers and retailers, ultimately leading to higher prices (CPI) when consumers purchase goods. Therefore, a higher-than-expected PPI data is usually seen as a warning sign of increasing inflationary pressures in the future.
As a result, according to the CME's FedWatch tool, the market's expectation of the Federal Reserve cutting rates by one basis point on September 17 plummeted from 99.8% the previous day to 90.5%.
And the cooling of interest rate cut expectations is generally unfavorable for risk assets like bitcoin.
This is because when interest rate cuts seem unlikely, it indicates that U.S. Treasury bonds, bank deposits, and other 'risk-free assets' will continue to offer attractive high interest rates. Investors may feel that rather than risking significant investments in bitcoin, it is better to steadily earn interest, thus withdrawing funds from bitcoin.
In addition, a high-interest rate environment also means that the cost of borrowing is high, and the 'hot money' (liquidity) available for investment and speculation in the market will decrease. The funds that can be invested in risk assets like bitcoin have diminished, and prices will naturally come under pressure.
The bitcoin market is currently at a critical crossroads; bitcoin not only has to digest the profit-taking sell pressure after hitting record highs but also must face the dual test of uncertainty from policy and headwinds from the macro economy. In the short term, whether prices can regain their highs will require time to observe.
References: cointelegraph, cointelegraph
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