Bitwise’s Europe head of research, who has been accurately bullish on bitcoin (BTC) for months, has turned cautious after last week’s 8% dip, warning of deeper losses in the coming weeks.

Bitcoin, the leading cryptocurrency by market value, fell 8.8% to nearly $95,000 last week, the biggest percentage drop since August, according to data source TradingView and CoinDesk Indices. The losses came as the Federal Reserve signaled fewer rate cuts for next year while stressing that it prohibited from holding BTC and doesn’t seek a change in the law to do so.

The so-called hawkish rate projections also roiled sentiment in traditional markets, leading to a 2% drop in the S&P 500 and a 0.8% gain in the dollar index, lifting it to the highest since October 2022. The yield on the 10-year Treasury note, the so-called risk-free rate, rose 14 basis points, breaking out bullishly from a technical pattern.

The risk-off mood may persist for some time, according to Andre Dragosch, director and head of research Europe at Bitwise.

“The big macro picture is that the Fed is stuck between a rock and a hard place as financial conditions have continued to tighten despite 3 consecutive rate cuts since September. Meanwhile, real-time measures of consumer price inflation have re-accelerated over the past months to new highs as well judging by truflation‘s indicator for U.S. inflation,” Dragosch told CoinDesk.

Dragosch is one of the few observers who correctly predicted a massive BTC price rally in late July when the sentiment was hardly bullish. BTC put in lows near $50,000 around that time and recently topped $100,000 for the first time on record.

“So, it’s quite likely that we will see more pain in the coming weeks, but this could be an interesting buying opportunity given the ongoing tailwinds provided by the BTC supply deficit,” Dragosch added.

The hardening of the Treasury yields, representing higher borrowing costs and relative attractiveness of fixed-income investments, typically leads to outflow from riskier assets like cryptocurrencies and stocks. A stronger dollar also makes USD-based assets expensive, discouraging capital inflows.

Inflation following the 1970s model?

If you have been following financial markets for a while, you have likely encountered discussions that price pressures in the U.S. economy are on the same inflation rollercoaster ride as the 1970s. Back then, the second wave was more intense than the first.

Dragosch notes that the sticky CPI inflation readings in recent months have raised concerns at the Fed about a potential second wave, leading to a more cautious stance on rate cuts.

“They are probably scared of the double hump scenario and a revival of the 70s twin peak in inflation which is why they are probably too reluctant to cut rates more aggressively,” Dragosch said. “They risk a significant acceleration in inflation if they cut rates aggressively, if they do little, the economy may suffer.”

Eventually, however, the financial tightening caused by rising yields and the dollar index would force the Fed to take action, Dragosch added, stressing BTC’s supply scarcity as a major bullish factor over the long run.