Bitcoin (BTC) temporarily lost the $29,000 support level in European trading hours on Thursday, but then recovered, setting the tone for other major cryptocurrencies, data showed.
The price decline followed a relatively positive market reaction to the release of the minutes of the U.S. Federal Reserve's May 3-4 meeting on Wednesday. The S&P 500 gained nearly 1% and the tech-heavy Nasdaq ended the day up 1.91%. In Europe, the Stoxx 600 and Germany's DAX each gained about 0.4% on Thursday.
The minutes showed that the agency was willing to be flexible on plans to raise interest rates and tighten monetary policy. Earlier, Fed Chairman Jerome Powell had said the Fed would take an "aggressive" stance - which traders feared would lead to inflation.
The Fed had raised the official U.S. interest rate by half a percentage point in early May. As previously reported, it plans to reduce its balance sheet by $47.5 billion per month for three months and by up to $95 billion per month starting in September.
"Inflation is far too high, and we understand the hardship it is causing," Powell said at the time. "We will act expeditiously to bring inflation down. At the time, the comments contributed to a decline in broader markets and also spread to cryptocurrencies.
Inflation in the U.S. has risen to its highest level in four decades and is being closely watched by Bitcoin traders, as the asset is seen by many as a hedge against rising consumer prices.
Bitcoin remains bearish, however. It has lost value in each of the last eight weeks - a first in its history - while futures and options data suggest traders are bracing for further declines.
An indicator tracking portfolio hedging hit a 12-month high this week, while yields on a popular bitcoin and ether (ETH) trade fell to a low.
Some analysts believe the current range of $29,000 to $30,000 could be breached in the coming weeks and the value could become more volatile.
"We warn that the current reduction in volatility could turn into an explosion in the near future, which could trigger momentum for a few days or weeks," Alex Kuptsikevich, a market analyst at FxPro, told CoinDesk in an email.
"A formal break of the consolidation above the previous local extremes, located at $30,200 and $29,300, in a sharp move would trigger a wave of liquidation of positions," Kuptsikevich said. Liquidations usually lead to sudden price movements as traders cover their positions to protect themselves from losses.
Other observers say the fluctuation is part of a consolidation in the broader market.
"Following the industry-wide sell-off in cryptocurrencies with the demise of the LUNA network last week, markets have entered a period of consolidation," Will Hamilton, a trader at crypto fund Trovio, said in a note to CoinDesk.
"Rotation has continued within the stablecoin market as another 1 billion USDT redemptions have been absorbed by USDC and BUSD," Hamilton said, suggesting that traders are not completely exiting the crypto market.