Bitcoin is down about 4% in May, heading for its first monthly loss of 2023.
The slump comes as traders navigate tighter monetary policy, recession fears, and general macro uncertainty.
A broader rally in risk assets has slowed as investors take stock of the macro environment.
Bitcoin is down about 4% in May as the cryptocurrency heads for its first monthly loss of the year on mounting macroeconomic uncertainty.
The crypto is down 2.1% on Wednesday at $27,208, per data from Messari.
Traders are navigating murky market conditions as central banks continue to deliver interest rates hikes to combat high inflation. The Federal Reserve has raised borrowing costs 10 consecutive times since March of 2022.
The European Central Bank is tightening as well to combat surging prices, with rates at levels not seen since the Great Financial Crisis in 2008. Tacking on additional concern for investors, ECB President Christine Lagarde has not indicated exactly how many more rate increases the central bank will need to deliver in order to cool inflation.
Higher rates have been a headwind for risk assets across the board, and bitcoin is no exception. Similar to stocks, the world's biggest cryptocurrency is wobbling after a steady rally as investors adjust their expectations for a softer policy approach from the Fed.
"When there is fear sentiment in the market, investors tend to flock to safer assets, such as gold and government bonds," Brigham Santos, COO of blockchain financial services provider Lama, told Insider. "This can lead to a sell-off in riskier assets, including bitcoin. In addition, central bank tightening can also lead to a decline in bitcoin prices."
Santos added: "This could work as a domino effect by generating higher interest rates, which can make it harder to borrow money to invest back [into] bitcoin."
Ethereum is up around 1.9% in the past month, while altcoins like solana have shed 6.5% in the same time frame.
"There's no doubt that bitcoin's price as well as wider crypto market movements are directly impacted by the US Federal Reserve and central bank policies. It is, after all, in response to central banking that Bitcoin was created in the first place," Ben Caselin, Vice President & Chief Strategy Officer at crypto exchange MaskEX, told Insider.
Despite slipping in May, bitcoin is still having an impressive year in 2023, up 65% year-to-date.
"Whilst there are multiple external factors that can stall the crypto market, such as regulation, monetary policies, and geopolitical events creating uncertainty and fear in the behaviour of institutional investors, there is also a massive adoption in the market," Santos said. "This means more users, more use cases, more innovation, and more value creation."
The blockchain startup exec added: "Mid and long-term signals are looking good as mass adoption is increasing and this is what ultimately defines the price."
Bitcoin has attracted more user activity on its network in 2023 with Ordinals, a protocol that expands the blockchain's use case. The network notched a new record for daily transactions earlier this month, for example, as interest surged in Ordinals, according to Dune Analytics.
Caselin said that although bitcoin's price is declining this month, he thinks it will be ultimately be "the escape hatch and optimal safe-haven" for investors. Bitcoin proponents often tout the crypto as an inflation hedge due to its finite supply of 21 million, as well as its independence from any centralized authority.
"We can therefore expect a continued disenfranchisement with the US dollar and uptake of bitcoin and other crypto assets. This will be reflected in price and we can surely expect upward price movements in bitcoin, even in 2023," Caselin told Insider.
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