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Warren Buffett dumps $13.3B in stocks — A warning sign for Bitcoin and risk assets?

Warren Buffett dumps $13.3B in stocks — A warning sign for Bitcoin and risk assets?

Warren Buffett’s recent move to cash suggests that he is preparing for a potential collapse in risk-on asset prices. As Bitcoin (BTC) has seen a 70% year-to-date rise and is closely correlated with equities, investors in BTC may also need to prepare for a possible stock market crash.

Buffett States the End of the “Incredible Period”

Berkshire Hathaway, headed by Buffett, sold $13.3 billion worth of equities in Q1 and increased its investments in cash and United States Treasuries, according to its latest quarterly earnings report. In the same period, they bought their own stock for $4.4 billion and invested $2.9 billion in public companies.

The successful performance of Berkshire Hathaway is seen as a key indicator for the health of the US economy, given its holdings in the railroad, electric utility, and retail businesses. However, despite attributing past successes to the growth of the US economy, the 92-year-old investor is no longer optimistic about it.

During an event last weekend, Buffett said, “The majority of our businesses will report lower earnings this year than last year,” adding that the US economy has been coming to the end of an “incredible period.”

Berkshire Hathaway’s cash reserves were increased by $2 billion to $130.6 billion in Q1 2023, the highest level since the end of 2021 when equities entered a bear cycle. Additionally, a large portion of their cash is in short-term Treasury bills and bank deposits, earning higher interest rates of around 5%. Essentially, Buffett is preparing for a potential stock market crash, especially after the banking crisis that the US is currently experiencing, which has resulted in shares of many banks, such as PacWest Bancorp and Western Alliance Bancorp, dropping in value.

Bitcoin Price Correlated with Nasdaq

The increasing likelihood of a global recession also poses a threat to Bitcoin, as its 100-week correlation with the Nasdaq has hit about 0.42%. Additionally, Mike McGlone, a Bloomberg Intelligence analyst, believes that BTC price may be the premier indicator for a stock market crash.

“Bitcoin could pace declines for risk assets — If the worst isn’t over for risk assets, Bitcoin may lead the way lower,” commented McGlone. “Bitcoin is up about 70% in 2023 to May 2 vs. 20% for the stock index, and those are maybe bounces within broader bear markets. The Fed [is] still tightening in May, and [is] more inclined to stay the course unless risk assets fall to ease inflation, may portend a lose-lose.”

Bitcoin/Nasdaq correlation index. Source: Bloomberg Intelligence

For the short term, economists expect core CPI to remain around 5% according to Bloomberg’s survey, with the US Consumer Price Index report releasing on May 10. This implies that further rate hikes may happen in the future.

On the other hand, a significant drop in inflation will prompt the Fed to think about stopping or even lowering interest rates in extreme cases. According to Fed funds futures’ data, it’s likely that there will be at least five rate cuts between May 2023 and January 2024, which may disrupt Buffett’s risk-off strategy.

Fed funds rate projections. Source: Bloomberg

Could Bitcoin Price Drop Below $25K Again?

Bitcoin’s price has dropped by roughly 6% in the past week and hit a low of $27,350 on May 9. Specifically, this caused Bitcoin’s price to drop below its 50-day exponential moving average (50-day EMA), which is around $27,950. 

Bears are targeting $27,000 as the next downside level, based on its recent trading history. In the event of further rate hikes, a decisive breach below the $27,000 support could cause BTC/USD to fall to its 200-day EMA, which is near $24,600. In other words, a 10% drop in June. 

Alternatively, the possibility of BTC’s price bouncing back from $27,000 and retesting the $30,000 resistance level, followed by a resumption of the upward trend over recent months, becomes more probable.

Related: Analysts at odds over Fed, US debt ceiling impact on Bitcoin price

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.