The current market is in a macro repricing phase dominated by inflation and interest rate expectations. For over a decade, Bitcoin has benefited from an environment of loose liquidity and low inflation, continuously reinforcing its narrative of "hedging against currency dilution." However, as institutional funding continues to flow in, the pricing logic of Bitcoin is changing, increasingly relying on interest rate expectations and capital flows.

From the current market performance, Bitcoin's recent weakness is not due to a deterioration of its fundamentals, but rather a weakening of the two core drivers of this bull market. On one hand, market expectations for interest rate cuts have been consistently revised downward; on the other hand, the incremental funds brought in by Bitcoin ETFs and Strategy (formerly MicroStrategy) are beginning to slow. Against this backdrop, the pressure on Bitcoin is rising, and the subsequent trend will still depend on changes in inflation and the Federal Reserve's policy path.

Inflation Reheats: Interest Rate Expectations Become Bitcoin's Greatest Constraint

Fiscal stimulus after the pandemic changed the mechanism of monetary transmission, with funds not only pushing up asset prices but also entering the real economy, significantly driving inflation higher about 18 months later. In June 2022, the U.S. CPI peaked at 9.1%; thereafter, inflation continued to decline, dropping to 2.4% in September 2024, which continuously reinforced expectations for interest rate cuts, providing important support for Bitcoin's rise.

However, this logic began to change at the end of 2024. As the market worried about inflation resurfacing, expectations for interest rate cuts continued to decline. Market expectations for rate cuts in 2025 were revised down from around six cuts priced in September 2024 to nearly zero by January 2025; although it briefly recovered to about 2.6 cuts, once CPI returned to around 3%, the market again turned cautious. The CPI data released on May 12, 2026, recorded 3.8%, prompting the market to even reprice approximately 1.8 rate hikes.

For stocks, higher inflation may still be partially absorbed through nominal income and earnings growth; however, Bitcoin lacks cash flow and earnings support, making it more sensitive to changes in interest rate expectations. When the market recalibrates for a higher rate path, Bitcoin often bears the brunt of the pressure.

ETF and Institutional Funding Slowdown: Two Engines of the Bull Market Cool Simultaneously

In this cycle, Bitcoin ETFs have been one of the most important sources of incremental funds. Since the expectation of ETF approvals rose in 2023, institutional funds have become the core driving force behind the market's upward movement. However, as the Federal Reserve's policy stance turned hawkish, capital inflows noticeably slowed. Entering 2026, Bitcoin ETFs began to see a continuous outflow, with investors’ willingness to increase holdings significantly declining.

Especially after the CPI data was released on May 12, 2026, ETF fund outflows intensified, with a cumulative outflow of about $4.3 billion. In the subsequent 15 trading days, 14 recorded net selling, indicating that institutional funds remain cautious in the face of a high inflation environment. Meanwhile, Strategy and Bitcoin ETFs have cumulatively allocated around $110 billion in Bitcoin, but as Strategy's room for increasing holdings gradually narrows, its role as the second largest funding engine has also begun to weaken.

With ETF capital inflows stagnating, institutional allocation willingness declining, and Strategy’s increasing momentum slowing, the two core drivers supporting this bull market are showing signs of cooling, posing greater resistance to Bitcoin's rebound.

Overall, the main challenge Bitcoin currently faces does not come from within the industry, but rather from changes in the macro environment. The loose liquidity and expectations for interest rate cuts that previously supported the market's rise are weakening, and institutional funds are also cautious regarding high inflation and higher interest rates. In the short term, as long as inflation remains high, Bitcoin will likely continue to maintain a volatile consolidation. However, from a historical cycle perspective, inflation will eventually peak. Once inflation subsides and expectations for rate cuts are restored, institutional funds are expected to flow back in, and Bitcoin may welcome a new round of stronger recovery.

The above views partly derive from BIT on Target, Contact Us for the complete BIT on Target report.

Disclaimer: The market has risks, and investment should be cautious. This article does not constitute investment advice. Trading digital assets may involve significant risks and volatility. Investment decisions should be made after careful consideration of personal circumstances and consultation with financial professionals. BIT is not responsible for any investment decisions made based on the information provided in this content.

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