Bitcoin slips as Fed chair speculation hits risky assets

Bitcoin slumped to a two-month low on Friday as speculation the next chair of the U.S. Federal Reserve might tighten up on cash in the financial system hit cryptocurrencies and lifted the dollar.

Cryptos are having a rough time in what was once hoped to be a golden era of flows and friendly regulation under President Donald Trump, with the market-leading bitcoin BTC= losing a third of its value since striking record highs in October.

It traded 2.5% lower on Friday at $82,300, extending the previous session's drop and heading towards a fourth straight month of losses, its longest losing streak for eight years.

Selling gathered pace on intensifying speculation that former Federal Reserve Governor Kevin Warsh was about to be anointed as Trump's pick to replace Fed Chair Jerome Powell.

Warsh has called for regime change at the central bank and wants, among other things, a smaller Fed balance sheet. Bitcoin and other cryptocurrencies have been regarded as beneficiaries of a large balance sheet, having tended to rally while the Fed greased money markets with liquidity - a support for speculative assets.

"As you start to talk about pulling the rug out from underneath that ... all the hedges against balance sheet expansion that people have been going for - gold, crypto, obviously bonds start to sell a little bit," said Damien Boey, portfolio strategist at Wilson Asset Management in Sydney.

Ether ETH= also skidded to a two-month low and traded 2.9% lower at $2,735.48.

Cryptocurrencies have been struggling for direction since last year's tumble and have been left behind by big rallies in gold and stocks that, on occasion, they had tracked.

Sean Dawson, head of research at Derive.xyz, a crypto options trading platform, said some correlation remains and that "fears around AI exuberance" were also a "big contributor" to Friday's selloff.

A 10% drop in Microsoft MSFT.O stock after it reported a massive AI spend but only a modest revenue beat sent a tremor through global markets overnight.

-Tom Westbrook and Rae Wee/Reuters