Bitcoin’s Trump trade dented by rising yields and strong US dollar

The New Year kicked off with markets setting up for President-elect Donald Trump’s inauguration into the White House and global markets are gripped by uncertainty as US Treasury yields spiked to yearly highs and risk assets slid amid speculation around potential tariffs under the incoming administration.

January began with strong momentum, as equities and digital assets surged on the so-called “Trump trade,” with investors anticipating a more favorable framework for digital assets and corporate balance sheets. However, this bullish sentiment quickly faded as US bond yields sharply rose, bringing the New Year’s rally to an abrupt pause and causing both digital assets and stocks to reverse earlier gains.

Bitcoin’s rally fades

Bitcoin’s (BTC) brief flirtation with $100,000 quickly fizzled and the cryptocurrency has posted a negative return of around 6% over the past 30 days, while other digital assets have suffered even steeper losses. “The correlation between Bitcoin and US interest rates has historically been negative,” said Eloísa Cadenas, Chief Innovation Officer at Monetae Exchange, speaking with Cointelegraph.

“Markets like Bitcoin and crypto rely on available liquidity to drive growth, and higher Treasury yields precisely reduce global liquidity, making more traditional instruments like bonds more appealing.”

While interest rate cuts typically stimulate investment in risk assets like cryptocurrencies, the Federal Reserve cautious outlook has elevated market uncertainty. Even though the Fed did cut rates for the third time in 2024 in December, it did so while signaling to the market that the pace of easing going forward would be much slower than anticipated.

Related: Bitcoin whales have scooped up 34K BTC since December dump: Analyst

US Treasury yields and the Trump trade

Yields on US debt soared as a result. This week, 30-year Treasurys hit a 14-month high, while the yield on the 10-year note approached 4.70%, putting strong pressure on growth-oriented risk assets and triggering a sell-off in global markets that was particularly strong in recent days in the face of strong economic data that suggested inflation could still be around the corner. 

On Wall Street, the three major indexes have been trending lower in recent weeks. Bitcoin has historically shown a strong correlation with stock indexes, particularly tech-heavy ones like the Nasdaq. “Currently, the correlation between Nasdaq and Bitcoin sits at 64%, as digital assets look for the next digital-specific catalyst,” said Robert Wallden, Head of Trading at Abra, told Cointelegraph.

“With US Nonfarm Payroll data tomorrow and global inflation rates bottoming, we have seen an uptick in volatility across the broad digital asset spectrum, with alt-coins feeling the brunt of the volatility,” he added. “But that being said, we prefer to use dips to add to positions as long as $82K holds in Bitcoin.”

While a favorable environment for the cryptocurrency sector under the Trump administration could benefit digital assets, concerns surrounding the US deficit and the potential for a tariff war that could stifle global growth are worrisome for risk-sensitive assets.

“Donald Trump’s appointments of cryptocurrency supporters to his administration suggest a more favorable US institutional framework while falling interest rates also offer a support,” Michael Strobaek, Global chief investment officer at Swiss investment bank Lombard Odier, wrote in a LinkedIn post. 

Others in the crypto space remain optimistic that the Trump trade will prevail in the long run.

“The impact of the Fed’s rates could lead to a variation of approximately $5,000, which has historically been the range, but it doesn’t compare to the $40,000 boost Trump’s presidency gave Bitcoin,” said Cadenas. 

“This trend should continue, and the correction we’re seeing now shouldn’t be alarming. Just two months ago, Bitcoin was priced at $70,000.”

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.