Bitcoin and Altcoins Plunge Amid Fed Chair Change and AI Bubble Concerns

Bitcoin and Altcoins Plunge Amid Fed Chair Change and AI Bubble Concerns

Summary:
The cryptocurrency market experienced a notable correction on Monday, with Bitcoin and Ether prices dropping amidst rising caution among traders driven by tightening liquidity and concerns over artificial intelligence debts.

Key Takeaways:

The crypto market saw a significant rise in leverage, with $527 million in liquidations occurring within just 24 hours, reflecting increased trader caution.
Tighter liquidity, coupled with rising AI debt risks, led many traders to step back from risky assets, thereby contributing to the market correction.

The cryptocurrency market faced a downturn on Monday, with Bitcoin revisiting the $85,000 mark and Ether dipping to $2,900. Traders grew more risk-averse following a survey indicating worsening economic conditions in the United States and changing expectations regarding the next chair of the US Federal Reserve.

US 5-year Treasury vs. Total Crypto Capitalization
Image Source: TradingView

The US 5-year Treasury's resilience, after plummeting to a low of 98.64 on Wednesday, strongly indicates that traders are seeking protection against inflation, especially since the Fed has recently reduced interest rates. The passing of the "One Big Beautiful Bill Act," which extended tax credits and increased the US debt ceiling by $5 trillion, complicates the situation further as the Fed is set to expand its balance sheet by $40 billion monthly.

Concerns about consumer spending remain significant, as a CNBC survey revealed that 41% of Americans intend to cut back on holiday spending this year, up from 35% in 2024. The survey also noted that 61% of respondents are struggling with affordability due to stagnant wages amid rising prices. Market watchers are awaiting the release of US retail sales data for October, along with November's nonfarm payroll figures.

Total Crypto Market Open Interest
Image Source: CoinGlass

The issue of excessive leverage in the cryptocurrency market persists, with futures open interest at $135 billion. Over the past 24 hours, more than $527 million in bullish leveraged positions were liquidated, prompting concerns about potential further declines. Weakness in the artificial intelligence sector has also pushed traders towards cash positions, as they pull back from riskier assets such as cryptocurrencies.

According to Reuters, hedge fund giant Bridgewater Associates has flagged the heavy dependence of tech companies on debt markets for funding their AI investments, labeling it a concerning situation. Greg Jensen, Co-Chief Investment Officer at Bridgewater, warned in a note that there is a reasonable likelihood of entering a bubble soon.

Annualized Funding Rate
Image Source: CoinGlass

On the Bybit exchange, demand for leverage on short positions surged, causing the annualized funding rate to drop below zero. This uncommon scenario, where buyers are compensated for maintaining leveraged positions, typically doesn't last long due to potential arbitrage opportunities. However, since the market crash on October 10, liquidity has significantly tightened, leaving some market makers facing considerable losses.

Part of the decline seen in the US stock market can be attributed to reduced odds for Kevin Hassett to become the next Fed Chair, which CNBC reported. President Donald Trump’s inner circle has advocated for a candidate perceived as more independent. Trump suggested Kevin Warsh would also be a suitable choice, helping alleviate concerns regarding the US dollar's fragility.

S&P 500 Index vs. US Dollar Strength Index
Image Source: TradingView

The US Dollar Index (DXY) found stability at the 98 level after declining for four consecutive weeks. This stability signals greater confidence in the US government's ability to stave off a recession, which may be somewhat supportive for the stock market but less so for the cryptocurrency space.

Bitcoin and Ether are commonly viewed as part of a separate financial system, hence the US dollar's relative strength reduces the need for alternative protective assets. The combination of excessive leverage in the cryptocurrency market and ongoing macroeconomic uncertainty is likely to keep pressure on prices.