Bitcoin, the leading cryptocurrency, has experienced a significant drop in price, falling to around $56,000 today. This decline comes as traders book profits in anticipation of a hawkish stance from the U.S. Federal Reserve. However, investors are hopeful that the crypto market will recover soon.

The Bitcoin price has officially entered a bear market, declining by more than 20% after three consecutive days of losses this week. Investors have been pulling money out of the crypto market, concerned about the Federal Reserve's potential retreat from its interest rate cuts this year.

Persistent inflation and slow economic growth, known as stagflation, continue to weigh on the market. The recent Personal Consumption Expenditures (PCE) data and the first-quarter GDP growth of 1.6% have heightened these concerns. Investors are now eagerly awaiting the Federal Reserve's monetary policy decision and Chair Jerome Powell's guidance, as they brace for potential market volatility.

A Potential Crypto Market Recovery on the Horizon

Analysts believe that a recovery in Bitcoin price and the broader crypto market is expected when the macroeconomic pressure eases, institutional buyers return, and technical chart patterns show early signs of a reversal.

Bitcoin Price Drops Over 10% to $56,000

The Bitcoin price has fallen by more than 10% in a single day, with panic selling by retail investors following the institutional investors' decision to stay away from risk assets due to rising risks. Bitcoin is currently trading at around $57,000, with a 24-hour low of $56,555 and a high of $62,121. The trading volume has increased by 70% in the last 24 hours.

Bitcoin is now down 22% from its all-time high of $73,803 in March, technically putting it in a bear market. However, it is still up 35% year-to-date and double where it was this time last year, thanks to the large money inflow into spot Bitcoin exchange-traded funds (ETFs) since January. As demand for spot Bitcoin ETFs wanes and investors see no immediate factors for a recovery, they have started booking profits, triggering a broader crypto market selloff.

Macroeconomic Factors Weigh on the Crypto Market

The U.S. dollar index (DXY) has risen to around 106.4, moving closer to six-month highs as investors prepare for key monetary policy decisions from the U.S. Federal Reserve. The Fed is expected to keep interest rates unchanged, but traders are more focused on Chair Jerome Powell's guidance on rate cuts this year.

The U.S. 10-year Treasury yield (US10Y) has also approached a 6-month high, jumping further to 4.67%. This rise came after data showed that U.S. labor costs grew more than expected, indicating that the Fed needs to keep interest rates higher for longer.

Bitcoin price typically moves in the opposite direction to the DXY and US 10-Yr Treasury yield.

Crypto Market Liquidation Exceeds $500 Billion

The crypto market cap has tumbled from $2.34 trillion to $2.13 trillion, causing investors to lose another $210 billion after a massive $250 billion liquidation in the last few days.

Coinglass data shows that more than $475 million were liquidated across the crypto market in the selloff, with $420 million in long positions and over $55 million in short positions being liquidated. Over 145,000 traders were liquidated, and the largest single liquidation order happened on the crypto exchange OKX, where someone swapped ETH to USD valued at $6.07 million.

Analysts expect a major rally in Bitcoin price to start from below $50,000, but whale accumulation could change the level for the rally near $54,000, as per analyst Michael van de Poppe. The final recovery in the market could start after the May 31 options expiry.