One of the main reasons why Bitcoin logged a supersonic, 200 percent rally after bottoming out at $3,858 in March 2020 was a $2-trillion stimulus package.
The US Congress dispatched the whopping sum to help American households and unemployed in surviving the lockdown imposed over the fast-spreading coronavirus pandemic. That marked the largest-ever emergency aid package in US history.
Collateral damages ensued in the currency market. Fearing that the new capital injection would raise inflation in the long-term, investors started offloading their US dollar positions to seek yields elsewhere. As a result, bids for gold, US stocks, and even Bitcoin increased.
The benchmark cryptocurrency, in particular, outperformed macro assets in terms of year-to-date gains. At the same time, the US dollar continued its downside course, ultimately falling to its two-year low on September 1.
On the same day, BTC/USD was trading at $12,086, up 213 percent from its mid-March nadir.
All and all, the narrative that pushed Bitcoin higher was an oversupplied US dollar market. But that is about to flip, according to recent reports.
No Second Stimulus
Hopes of US Congress launching a second stimulus package has become pale as an unexpected rising in manufacturing and reduction in the jobless rate has eased politicians’ worries about a longer period of US economic meltdown.
Economists and analysts have earlier anticipated the Congress to inject at least a $1.5 trillion aid into the US economy. But a constant disagreement over the size of the package between the Republicans and the Democrats stalled the fund from coming out. The latter wanted a $3 trillion economic aid.
And now, when the US economy is showing signs of recovery, many expect that the Republicans would refrain from launching an expensive stimulus. Instead, they may end up capping the amount to below $500 billion.
“THE CO-OPERATIVE SPIRIT WE HAD IN MARCH AND APRIL HAS DISSIPATED AS WE MOVE CLOSER AND CLOSER TO THE ELECTION,” MITCH MCCONNELL, SENATE MAJORITY LEADER, TOLD MEDIA LAST WEEK.
More Downside for Bitcoin
The cut-off in the dollar injection may strengthen it further in the coming weeks. The US dollar index has already rebounded by around 1.20 percent from its two-year low. Its uphill move has coincided with a sharp 21-percent decline in the Bitcoin market.
“BITCOIN IS APPROACHING AN OVERSOLD STATE, BUT THERE IS ROOM TO FALL STILL,” SAID PROMINENT TRADER CRYPTOHAMSTER. “IN THAT CASE, SUCH A BEAR FLAG COULD DRAG BTC TO ~$8500.”
Meanwhile, other analysts reminded that Bitcoin’s latest downside correction could be a part of its previous uptrend. Larry Davis, a cryptocurrency YouTuber, stated that BTC/USD fell 37 percent back in January 2017, but rose to its all-time high of $20,000 by the end of the year.
“THOSE WHO BOUGHT THAT DIP WENT INTO THE HALL OF FAME,” HE ADDED. “YOU HAVE A CHOICE RIGHT NOW IN THE MARKET, WHAT ARE YOU DOING?”
Bitcoin was trading at $10,182 at the time of this publication.