Cryptocurrency markets saw sharp selling pressure this past week as yields on 10-year U.S. Treasury notes rose and dollar liquidity declined. Bitcoin, the largest cryptocurrency by market value, fell 9% to $27,600, which constituted its largest single week percentage loss since early November. This may be largely attributed to the USD Liquidity Conditions Index slipping to $6.13 trillion, the lowest in over a month, as well as traders anticipating a 25 basis point rate hike by the Federal Reserve in May.

According to industry experts, a lack of encouraging signs surrounding the monetary liquidity front and a broad fuel to risk assets, including cryptocurrencies, were major contributing factors in Bitcoin's descent. Moreover, traders are now pricing in a higher probability of the Federal Reserve continuing its tightening cycle, which will also likely to affect the cryptocurrency market in the near-term.

The issue of the U.S. debt ceiling is an additional cause for concern as the country is facing the risk of reaching its self-imposed cap on borrowing at the end of June. While a failing to reach a deal would be hugely problematic, one-year credit default swaps are currently showing a 2% probability - a relatively small risk when compared to the huge economic implications. What's more, even if the U.S. does default, bitcoin might see a haven bid like it did during the banking crisis in March.

Ultimately, while the current market movements are concerning, a political resolution and better understanding of Trump's monetary policies might help improve liquidity levels and spur an eventual rebound in risk assets and, more specifically, bitcoin.



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