Key highlights:
Robust demand for US Treasurys and a decreased likelihood of a Fed rate cut suggest that investors are gravitating towards safer assets, leading to diminished interest in Bitcoin.
Economic sluggishness in Japan and weaker US employment data exert pressure on Bitcoin, hindering its role as a hedge in the short term.
Bitcoin (BTC) has consistently struggled to maintain its position above the $92,000 mark over the last month, causing market participants to formulate various theories regarding its price decline. Some traders suspect market manipulation, while others attribute the downturn to growing apprehensions about the artificial intelligence sector, even without substantial evidence to back these claims.
On Friday, the S&P 500 traded only 1.3% below its all-time peak, whereas Bitcoin lingers 30% beneath the $126,200 level it hit in October. This disparity signals a rise in risk aversion among traders and undermines the idea that fears of an AI bubble are causing widespread market weakness.
Despite Bitcoin’s decentralized attributes and long-term potential, gold has come to be viewed as the primary hedge amidst ongoing economic instability.
Fed balance sheet reduction limits liquidity, keeping Bitcoin near $90K
One reason for Bitcoin’s inability to surpass $90,000 is the US Federal Reserve’s ongoing balance sheet reduction throughout 2025, a strategy designed to extract liquidity from financial markets. However, this trend reversed in December as signs of job market weakening and disappointing consumer data raised concerns regarding future economic growth.
Retail giant Target lowered its fourth-quarter earnings forecast on Dec. 9, and Macy’s alerted on Dec. 10 that inflation would negatively impact margins during the holiday sales season. Most recently, on Dec. 18, Nike announced a decline in quarterly sales, resulting in a 10% drop in its stock price on Friday. Traditionally, declining consumer spending fosters a bearish sentiment towards riskier assets.
Despite clear indications of a shift towards a less restrictive monetary policy, traders are increasingly doubtful about the US Fed’s capability to lower interest rates below 3.5% by 2026. Part of this skepticism arises from a 43-day US government funding shutdown that complicated the release of critical November employment and inflation statistics, further obscuring the economic landscape.
The chances of an interest rate cut at the FOMC meeting on Jan. 28 dropped to 22% on Friday from 24% the previous week, as per the CME FedWatch Tool. Notably, demand for US Treasurys remained steady, with the 10-year yield anchored at 4.15% on Friday after briefly dipping below 4% in late November. This behavior reflects increasing risk aversion among traders, which contributes to the declining interest in Bitcoin.
Although Bitcoin’s correlation with traditional markets is decreasing, it does not imply that cryptocurrency investors are shielded from unfavorable economic conditions. Weak demand for Japanese government bonds has heightened contagion risks, as the nation is experiencing 10-year bond yields exceeding 2% for the first time since 1999.
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Japan boasts the world’s fourth-largest Gross Domestic Product and its currency, the yen, features a $4.13 trillion monetary base. The country’s 2.3% annualized GDP contraction in Q3 is remarkable, particularly since Japan has maintained negative interest rates for over ten years and depended on currency depreciation to invigorate economic growth.
Bitcoin’s difficulties around the $90,000 mark signify uncertainties regarding global economic growth and weaker US labor market figures. As investors grow more risk-averse, the benefits of lower interest rates and stimulus on risk-associated assets weaken. Therefore, even if inflation revives, Bitcoin is unlikely to function as an alternative hedge in the short term.
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