Bitcoin price drops its early week gains — Here is why

Bitcoin (BTC) prices rose 6% from October 1 to October 2, but fell 4.5% on the day after failing to break through the $28,500 resistance level. The decline was driven by the disappointing performance of the Ethereum (ETH) futures exchange-traded fund (ETF) launched on October 2, as well as concerns about an impending economic recession.

The Bitcoin price correction on October 3 marked 47 days since Bitcoin last closed above $28,000 and resulted in the liquidation of long leveraged futures contracts worth $22 million. But before discussing the events affecting Bitcoin and the cryptocurrency market, let’s first try to understand how the traditional financial industry has affected investor confidence.

An overheating U.S. economy could lead to more Fed action

The latest U.S. labor market data released on October 3 showed that the number of job openings at the end of August was 9.6 million, up from 8.9 million in July. Investors’ expectations for further tightening measures by the Federal Reserve have increased.

Federal Reserve Chairman Powell said at the meeting speech Speaking at the Jackson Hole Economic Symposium in August, “there is evidence that labor market tightness is no longer easing, and a monetary policy response may be needed.”

As a result, traders are now pricing in a 30% chance that the Fed will raise interest rates at its November meeting, compared with a 16% chance the week before, according to CME’s FedWatch tool.

Ethereum futures ETF launch failed

On October 2, the market welcomed nine new ETF products that are explicitly designed to reflect the performance of futures contracts linked to Ethereum. However, as of noon Eastern time, the products had traded less than $2 million in their first trading day. Eric Balchunas, senior ETF analyst at Bloomberg, pointed out that trading volume was lower than expected.

On the day of listing, the Ethereum ETF’s trading volume significantly lagged behind the $1 billion ProShares Bitcoin Strategy ETF’s trading volume. Notably, the Bitcoin futures-linked ETF was launched in October 2021 during a boom in the cryptocurrency market.

The incident could dampen investor prospects for potential inflows should a Bitcoin spot ETF eventually emerge. Still, uncertainty remains over the likelihood and timing of these approvals from the U.S. Securities and Exchange Commission (SEC).

Binance faces class action lawsuit, regulatory pressure increases

On October 2, Binance US and its CEO Changpeng Zhao filed a class action lawsuit in the Northern California District Court. The lawsuit alleges unfair competition aimed at monopolizing the cryptocurrency market by harming its rival, now-defunct exchange FTX.

The plaintiff claims that CZ’s statements on social media were false and misleading, particularly because Binance had previously sold its holdings of FTT tokens prior to the announcement on November 6, 2022. The lawsuit alleges that CZ’s intent was to drive down the price of FTT tokens.

The criminal case against Sam Bankman-Fried will begin on October 4 in New York. Although CZ has denied the accusation of unfair competition, speculation about the matter continues to circulate within the cryptocurrency community.

Bitcoin’s correlation with traditional markets appears higher than expected

The decline in Bitcoin prices on October 3 seemed to reflect concerns about an impending economic recession and the Federal Reserve’s potential monetary policy response. Additionally, it shows how closely the cryptocurrency market is linked to macroeconomic factors.

The lofty expectations for cryptocurrency ETFs also suggest that the $28,000 level may not be the consensus among investors given regulatory pressure and legal challenges, such as the class-action lawsuit against Binance, highlighting ongoing risks in the space.