Bitcoin sinks to $57,000 to start May as investors brace for Fed rate decision

Bitcoin slid to its lowest level since in more than two months to kick off May, as investors kept an eye on the Federal Reserve's upcoming interest rate decision.

The cryptocurrency dropped as much as 7% to $56,526.00, its lowest level since Feb. 27, according to CoinMetrics. It was last lower by about 4% at $57,413.94.

Bitcoin has been trading in a tight range, with key catalysts for the cryptocurrency — U.S. exchange traded funds and the halving — now behind it. Its retreat from March all-time highs intensified this week amid broader risk-off sentiment. It's down about 10% for the week and on Tuesday posted its worst month since November 2022.

Bitcoin (BTC) slides under $57,000 for the first time since February

Investors are focused on the upcoming interest rate decision from the Federal Reserve, which will conclude its two-day policy meeting on Wednesday afternoon. The central bank is widely expected to hold interest rates steady, according to fed funds futures pricing data. Investors are looking for clues from Fed Chair Jerome Powell on what needs to happen before rates can come down. 

"The broader macro backdrop has deteriorated for assets like crypto that thrive on liquidity," Geoff Kendrick, Standard Chartered's head of digital asset research, said in a note Wednesday. "Broader liquidity measures in the U.S. ... have deteriorated rapidly since mid-April."

"With a backdrop of strong U.S. inflation data and less likelihood of Fed rate cuts, [liquidity] matters at the moment," he added.

Kendrick also pointed to five consecutive days of outflows from U.S. bitcoin ETFs and a "poor" reaction to the launch of spot bitcoin ETFs in Hong Kong this week. The drop in bitcoin also comes a day after the former CEO of Binance, Changpeng Zhao, was sentenced to four months in prison over money laundering charges.

Bitcoin investors expect a strong recovery in the cryptocurrency later this year, but say its price could continue to chop for the next few weeks given macro and geopolitical pressures.

"We could see a 1-2 month consolidation in bitcoin prices, trading in a range with swings of $10,000 on either side," said analysts at Bitfinex. "We expect the positive impact of the halving, which has brought about a reduction in bitcoin supply, will be seen in later months."

—CNBC's Michael Bloom contributed reporting.