Bitcoin (BTC) price recovered from its sharp sell-off, suggesting it functions as a hedge against uncertainty

Bitcoin (BTC) price faced a sharp 4% correction during the Asian trading session on May 18, tumbling from an “important level”

Key takeaways:

Bitcoin (BTC) price recovered from its sharp sell-off from $107,000, suggesting it functions as a hedge against uncertainty for investors reacting to Moody’s recent downgrade of the US credit rating.

Moody’s downgraded the US credit rating to Aa1 from Aaa, signaling concerns over the US’s $36 trillion debt and rising deficits. This sparked turbulence in the market, and also saw a spike in US Treasury yields.

Despite the short-term pressure from these macroeconomic shifts, Bitcoin’s long-term outlook appears bullish due to traders being cautious on shorting and the US dollar showing signs of weakness.

Bitcoin price faced a 4% correction during the Asian trading session on May 19, hitting a stall at an “important level,” according to data from blockchain analytics firm Glassnode. The analytics firm pointed out that Bitcoin’s surge was halted just below $106,600, a critical level where 31,000 BTC are held in a "supply cluster."

This group of coins, which began accumulating on Dec. 16, 2024, showcases the strong conviction of these investors, who have neither sold nor averaged down significantly despite price fluctuations.

BTC price drops as macro headwinds heat up

The BTC price drop came amid increasing macroeconomic headwinds. These include a historic downgrade of the US credit rating by Moody’s and the anticipation of a potential rise in US Treasury yields, sparking speculation about the near-term trajectory of risk assets like Bitcoin.

After the US markets closed on May 16, Moody’s Investors Service downgraded the US credit rating to Aa1 from Aaa in a move that marks the first downgrade of the US in the modern era.

Moody’s elaborated on the downgrade, highlighting concerns over the US’s ballooning debt, with projections of federal deficits reaching 9% of GDP by 2035, up from 6.4% in 2024. Furthermore, interest payments on US debt are poised to claim 30% of federal revenue by 2035, a significant escalation from 18% at present.

This downgrade follows similar actions by S&P in 2011 and Fitch earlier in 2023, and it underscores the unsustainable fiscal path of the US, which is likely to erode investor confidence and contribute to broader market turbulence.

The downgrade also comes amid a surge in US Treasury yields, which could exert further impact on the markets. Commencing at 5.53% following the downgrade announcement, the 10-year Treasury yield is anticipated to rise, while the 30-year yield, currently at 4.98%, is also expected to follow suit.

As investors process the implications of higher borrowing costs for the US government, the 30-year Treasury yield is likely to experience a continuation of its upward trajectory.

The Kobeissi newsletter highlighted that past experience with credit downgrades shows a mixed reaction in Treasury yields. After S&P downgraded the US in 2011, we saw a 35% decline in 10-year Treasury yields from a high of 5.3% in December 2011 to a low of 3.5% by March 2012. Conversely, following Fitch’s downgrade earlier in 2023, a 23% increase in 10-year Treasury yields was observed.

However, this time, the rapid spike in 10-year Treasury yields is more aligned with the 2023 pattern, fueled by persistent inflation worries and concerns over the US’s fiscal health. Such macroeconomic shifts are known to influence cryptocurrency prices.

Is short-term pain long-term gain for BTC price

The 4% dump in Bitcoin price on May 19 could be seen as a reaction to these macroeconomic headwinds. As investors digest this news and the implications of higher borrowing costs on risk assets, Bitcoin could face sustained pressure in the short term.

However, for the long term, there are interesting tidbits that suggest a bullish bias. According to Bitcoin researcher Axel Adler Jr., traders betting on price declines have been “significantly more cautious” in building up their short positions during this bull cycle, comparing it to the 2021 bull market.

This observation suggests that, despite the market's volatility, traders are approaching short positions with more caution than they did in the previous bull cycle, which could be seen as a sign of a generally bullish long-term outlook.

Historically, Bitcoin has demonstrated resilience and served as a hedge during periods of economic turmoil, such as the COVID-19 crisis. In the current climate of macroeconomic uncertainty and distrust in fiat systems, which is aggravated by the US’s worsening fiscal outlook, Bitcoin could benefit.

The US Dollar Index (DXY) is showing signs of