Bitcoin Drops 4% Amid US Credit Downgrade, Treasury Yield Surge

Bitcoin's price experienced a sharp 4% correction during the Asian trading session on May 19, dropping from an important level just below $106,600. This level is significant as it marks a supply cluster where 31,000 BTC are held, indicating strong conviction among investors who have not sold despite price fluctuations. The correction came amidst intensified macroeconomic headwinds, including a historic downgrade of the US credit rating by Moody’s and a rise in US Treasury yields, which raised speculation about the near-term trajectory of risk assets like Bitcoin.

Moody’s downgraded the US credit rating from Aaa to Aa1 on May 16, citing concerns over the US's ballooning $36 trillion debt and projected federal deficits reaching 9% of GDP by 2035. This downgrade, the first in modern history, follows similar actions by S&P in 2011 and Fitch in 2023. The downgrade has rattled investor confidence, contributing to market turbulence and a surge in US Treasury yields. The 10-year Treasury yield opened at 5.53% post-downgrade on May 19, while the 30-year yield reached 4.98%, reflecting investor concerns over higher borrowing costs for the US government.

Despite the short-term pressure from macroeconomic shifts, Bitcoin’s long-term outlook remains bullish. Bitcoin researcher Axel Adler Jr. noted that traders betting on price declines have been significantly more cautious in building short positions during this bull cycle compared to 2021. This suggests a generally bullish long-term outlook, as bears grow risk-averse. Historically, Bitcoin has served as a safe haven during economic turmoil, such as the COVID-19 crisis, and could benefit long-term from eroding trust in fiat systems, especially with the US fiscal outlook deteriorating.

The US Dollar Index (DXY) is signaling a potential decline below $100, reflecting a weakening dollar that has triggered a classic "risk-off" response. This shift has reignited interest in gold, which saw a modest increase, though broader market reactions remain subdued. Typically, a weaker dollar bolsters risk assets like Bitcoin, as investors seek alternative stores of value. Adler Jr. said, “Overall, despite the prevailing 'risk-off' sentiment (typically a headwind for high-volatility assets), Bitcoin may find itself in a relatively stronger position in the current environment due to its 'digital gold' narrative and the supportive effect of a weaker dollar.”