Bitcoin drops below $27,000 level amid recent banking turmoil

Bitcoin dropped below $27,000 as the most recent turmoil in the banking sector increased macroeconomic uncertainties.

On-chain data showed that Bitcoin had been trending downward over the past week, with analysts saying that the market was looking for a price catalyst. It hit below $27,000 for the first time since March on Wednesday, then momentarily regained the threshold.

The cryptocurrency hovered above the $27,000 line on Thursday morning before falling below the threshold at around 1 p.m. ET. It traded at around $26,950 on Thursday evening, down more than three percent in a day.

Similar to Bitcoin, the second-largest token by market capitalization Ether also showed a downward trend. The token's price hovered around $1,788 on Thursday, falling more than 3.5 percent. According to CoinDesk, it was the first time for Ether to drop below the $1,800 line since late April.

The CoinDesk market index, which tracks the broad crypto market's performance, was down 3.7 percent on Thursday.

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Emurgo Fintech managing director Vineeth Bhuvanagiri said crypto investors remained concerned about low liquidity, explaining that it made "seemingly slight selloffs tend to have an outsize impact on price." At the same time, Oanda senior market analyst Edward Moya pointed out that the recent banking turmoil did not create "strong demand" for crypto tokens, unlike in March.

Bitcoin rallied in March after regional lender Silicon Valley Bank collapsed. According to analysts, the banking stress triggered by the bank's failure prompted investors to seek other alternatives. Analysts explained that the rally showed how investors considered the token as a reliable asset to store value due to its true decentralized nature.

Recently, several regional lenders reported significant deposit outflows, including PacWest Bancorp. The Los Angeles-based lender saw a 22.70 percent drop in its stock value on Thursday after the report. Analysts, however, noted that the news did not significantly heighten fears about the health of the overall banking sector.

"Banking contagion fears still remain low as some banks like Western Alliance show deposits are rising," Moya said.

Debt ceiling crisis' impact on Bitcoin price

Bhuvanagiri said the unresolved debt ceiling crisis in the U.S. could trigger volatility in Bitcoin price. NYDIG global head of research Greg Cipolaro also said it was "a little bit of calm before the storm right now" for the Bitcoin market. According to Cipolaro, the crypto market will be volatile once politicians begin negotiations about the national debt limit.

“As we get into the negotiations in the end, the ceiling will ultimately be raised.”

Greg Cipolaro, Global Head of Research at NYDIG

Nevertheless, Bhuvanagiri and Cipolaro said Bitcoin would not experience the impact of the debt ceiling crisis in the longer term. Cipolaro reasoned that many investors considered the token a valid asset that could "insulate themselves from the machinations of politicians and monetary policy setters."

The U.S. needs to raise the debt ceiling to be able to pay its debts, with Treasury Department Janet Yellen warning that default can happen as soon as next month. Officials, including Federal Reserve chairman Jerome Powell, have urged Congress to raise the debt limit on time.

A U.S. failure to pay its debts can bring a "catastrophic" impact on the economy, pushing it to a recessionary era that will also have global repercussions. Some analysts pointed out that the current situation resembled the debt ceiling crisis in 2011 when the government increased the limit 72 hours before the deadline.

Republicans and Democrats have not agreed to the terms linked to the debt ceiling increase, with the former requesting the administration to cut expenditures and limit spending growth in the following years. The administration argues that cutting public spending will lead to the failure of some of its programs.

President Joe Biden's second meeting with top politicians to discuss the debt ceiling issue has been postponed to next week. Analysts said the delay did not necessarily signal a problem in the discussion. The White House has also acknowledged that it needs to agree to public spending cuts.