Bitcoin slid to its lowest level in over two months to kick off May, as the Federal Reserve held interest rates steady.

The cryptocurrency at one point dropped 5% to $56,526.00, its lowest level since Feb. 27, according to CoinMetrics. It was last lower by about 4% at $56,954.13.

Investors have been focused on the latest interest rate decision from the Federal Reserve, which concluded its two-day policy meeting on Wednesday afternoon. The central bank kept its benchmark short-term borrowing rate unchanged, as expected. The federal funds rate has been in a targeted range between 5.25% and 5.50% since July 2023.

"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."

Bitcoin briefly rallied as high as $60,989.58 before reversing lower.

"Higher real interest rates have likely supported the dollar and weighted on bitcoin over the last month," said Zach Pandl, head of research at Grayscale Investments. "The FOMC statement expressed concern about inflation, but did not take rate cuts off the table. An expectation of future rate cuts would support bitcoin's price and crypto markets, more broadly."

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. Bitcoin is down more than 10% for the week, and on Tuesday it posted its worst month since November 2022.

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 and Jeff Cox contributed reporting.