Bitcoin (BTC) Price Drops 5% as Strong U.S. Economic Data Reignites Inflation Fears

Economic data on Wednesday sparked a sell-off in risky assets, with Bitcoin dropping 5% and broader crypto market capitalization falling 7%. Here's a summary of the market reaction and key takeaways.

Economic Data Fuels Market Shift

Labor Department figures showed a surprising increase in jobs in November, signaling continued demand in the broader labor market. In a separate report, the U.S. services sector expanded at a faster pace in December, with input prices surging to their highest levels in nearly two years.

These reports fueled speculation that the Federal Reserve may have to maintain higher interest rates for longer to curb potential inflationary pressures. The benchmark 10-year Treasury yield rose to 4.699%, its highest level since April 2024, as investors anticipated tighter monetary policy.

“Stronger economic indicators shifted market sentiment, with riskier assets like cryptocurrencies feeling the heat,” said Ryan Lee, chief analyst at Bitget Research.

Crypto Market Suffers Broad Sell-Off

Bitcoin's 5% drop to $96,602 on Wednesday led a broader crypto market sell-off, with Ethereum falling 8.4% to $3,373, XRP declining 3% to $2.33, and Solana losing 8% to settle at $199.36. By late Tuesday, the total cryptocurrency market capitalization fell 7.2% to $3.5 trillion.

Rising interest rates tend to hurt high-risk assets like cryptocurrencies, as investors pivot toward safer options like bonds, noted market analyst Ryan Lee. The surge in Treasury yields has made traditional investments increasingly appealing compared to the volatile crypto market.

Mass Liquidations Amplify Volatility

The rapid price corrections triggered liquidations of approximately $555 million in long positions, according to Coin彙整. These leveraged positions, which bet on price increases, were wiped out in the derivatives markets, marking the first major liquidation event of the year.

“This liquidation event has amplified volatility, with forced sales accelerating price adjustments,” explained Lee. “Traders will likely reduce leverage in the short term, potentially leading to a consolidation phase or further declines depending on sentiment.”

Macroeconomic factors, such as the upcoming inauguration of Donald Trump on January 20 and an interest rate decision by the Federal Reserve on January 29, are expected to continue influencing cryptocurrency performance.

“The interaction of the macro factor with market dynamics continues to influence crypto performance,” said analysts, adding that events like Trump's inauguration will likely have a greater impact on market sentiment going forward.

Bitcoin's sensitivity to macro shifts is evident in this environment,” noted Lee. “While institutional adoption does continue to give a long-term bullish outlook, short-term volatility is very likely to remain.”

As these developments finally settle into the market, traders are bracing for further volatility while keeping a close watch on economic indicators for any announcements regarding policy changes. Whether Bitcoin manages to reclaim levels above $100,000 will largely depend on how the broader economic narrative unfolds in the coming weeks.