Bitcoin’s Monster Rally Faces Challenges

Bitcoin’s recent gains may hit a wall, according to a warning from Piper Sandler’s Chief Investment Strategist, Michael Kantrowitz, urging investors to secure profits.

In a note published on Tuesday, Michael recommended clients to take profits on positions that have appreciated significantly since early April.

This caution arises as markets transition from anticipating an inflation-induced recession to expecting a balanced “Goldilocks” environment—neither too hot nor too cold.

Piper Sandler identifies high-beta, low-quality stocks as currently vulnerable, having experienced substantial multiple expansion without corresponding improvements in earnings outlook.

Bitcoin is similarly at risk, given its close correlation with equity markets. Michael cautioned that Bitcoin could decline if a sell-off in risk assets occurs due to macroeconomic pressures.

Correlation with Equity Markets Affects Bitcoin Ahead of August

Since bottoming out on April 9, Bitcoin has surged 54%, reaching an all-time high recently, fueled by institutional investments through Bitcoin ETFs and corporate treasury investments.

In comparison, the S&P 500 gained approximately half as much during the same period. Despite Bitcoin’s reduced volatility, it remains susceptible to declines amid stock market turbulence.

A clear example of this occurred earlier this year when after President Trump announced tariffs, the S&P dropped 4%, and Bitcoin fell by 5%. While the declines were smaller than previous cycles, the trend holds; during market panic, Bitcoin tends to decline.

Michael forecasts minimal risk priced in before the August 1 tariff deadline but warns that unexpected developments could disrupt market stability. He also predicts “modestly higher consumer price index readings” in the upcoming months that could alter expectations regarding interest rates.

If inflation rises and hopes for rate cuts dissipate, traders might offload higher-risk assets, including Bitcoin.

August historically presents challenges for both crypto and stocks, as trading volumes typically decline, and thin trading can amplify small sell-offs into larger drops. Although Bitcoin has displayed less volatility this year, it remains vulnerable to sharp downturns during risk-averse sentiment.

To clarify, Michael’s stance isn’t entirely bearish towards U.S. stocks. It’s seen as a risk management strategy. He noted that while valuations are high, earnings are expected to elevate equities, though less speculative stocks may not lead this surge.

“While valuations are expensive, we expect earnings to continue to propel equities higher, albeit with less speculative leadership.”