Bitcoin's weakness may mean the U.S. stock-market rally isn't sustainable. Here's why.

By Frances YueWelcome back to Distributed Ledger. This is Frances Yue, crypto reporter at MarketWatch.Bitcoin's recent weakness may indicate that U.S. stock market's rally is more fragile than it seems, even as the S&P 500 SPX scored a fresh record close on Wednesday, Tyler Richey, co-editor at Sevens Report Research, told MarketWatch.The largest cryptocurrency (BTCUSD) has been trading in a range between $93,000 and $100,000 so far this month, according to Dow Jones Market Data. It traded near $96,600 on Wednesday, roughly 12% below its record high of $109,225 reached on Jan. 20, when Donald Trump was sworn in as U.S. president."There was a lot of froth there for risk assets after the election," Richey said in a phone interview. Bitcoin and stocks both rallied after the election in early November, as investors expected the Trump administration to roll out pro-growth policies and crypto-friendly regulations, Richey noted. For the past few years, bitcoin has often traded in tandem with risk assets, especially stocks.However, as Trump has threatened and enacted tariffs on a number of U.S. trading partners, investors have been concerned that inflation may heat up again, which could keep the Federal Reserve from cutting interest rates further this year.A small number of top Fed officials didn't see much more room for rate cuts, according to minutes of the central bank's January meeting, released on Wednesday.Fed-funds futures are now pricing in an 81% chance that the Fed will deliver at least one more rate cut this year, according to the CME FedWatch Tool, at last check.In the face of macroeconomic uncertainty, the S&P 500 notched a record-high close on Wednesday, while bitcoin has posted sluggish performance over the past week. The divergence between the two asset classes may provide a "cautious signal" for U.S. stocks, showing that the latter's rally isn't sustainable, according to Richey.Bitcoin is seen by some investors as a proxy for liquidity, Richey noted. Bitcoin moved in the same direction as global liquidity 83% of the time in any given 12-month period as of September of last year - a higher percentage than any other major asset class, according to a report by bitcoin analyst Sam Callahan."Weakness in bitcoin is a macroeconomic negative, historically, and typically coincides with declining liquidity," boding ill for stocks, Richey said.U.S. stocks broadly closed higher on Wednesday. The S&P 500 and the Dow Jones Industrial Average DJIA both ended up 0.2%, while the Nasdaq Composite COMP finished up 0.1% on the day.Find Frances Yue on X to share your thoughts on bitcoin and stock performance under the Trump administration.Bitcoin may fall toward $73,000From a technical perspective, bitcoin's price action has taken on an "increasingly heavy tone," as futures have fallen below their 21-day moving average toward a critical support level at around $91,500, according to Richey."The bitcoin rally has stalled and turned sideways amid a price drift away from record highs, confirmed by momentum indicators and relative-strength readings, to the benchmark safe-haven store of value, gold," Richey wrote in a Tuesday note.Due to such reasons, it is increasingly likely that bitcoin tests its support level at around $91,500. If that level is violated, bitcoin may fall toward $73,400, its high reached in the first half of 2024, Richey noted.On-chain data shows bearish signsBased on on-chain analysis, bitcoin may fall toward $86,000 if its demand growth doesn't improve from current levels, according to analysts at crypto research firm CryptoQuant. This type of on-chain analysis examines data directly recorded on blockchain networks to gain insights into market trends and investor behavior.Bitcoin's apparent demand - or the difference between the amount of bitcoin mined and the inactive supply for over a year - fell from a high of 279,000 in December to around 62,500 as of Wednesday.In addition, bitcoin's network activity has continued to decline, according to CryptoQuant analysts.CryptoQuant's bitcoin network-activity index - which measures the growth in key network metrics such as active addresses, number of transactions, block size and more - stood on Wednesday at the lowest level since February 2024.Crypto in a snapBitcoin (BTCUSD) edged up 0.3% over the past seven days to trade at around $96,655 as of Wednesday evening. Ether (ETHUSD) rose 1.5% over the past seven days to around $2,724, according to Dow Jones Market Data.Must-readsHere's what Argentina President Milei's crypto scandal could mean for Argentine stocks (MarketWatch)MicroStrategy has cut 20% of its workforce as its bitcoin buying multiplies (MarketWatch)Anthony Scaramucci was a hot Wall Street manager last year thanks to crypto. Now he sees bitcoin hitting $200,000 - this year. (MarketWatch)'Trump trades' like the dollar and bitcoin are stalling, while Chinese stocks are racing ahead (MarketWatch)Why GameStop might jump on board the bitcoin bandwagon (MarketWatch)Bitcoin could see $23 billion inflow if these 18 states pass bills to establish crypto reserves (MarketWatch)-Frances YueThis content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.