What to expect in crypto ahead of the inflation report
Key points to remember
- Bitcoin has risen for eight straight days, now up 9.2% on the year.
- The period of low volatility in the cryptocurrency markets, coupled with weaker inflation data, drove prices higher.
- The latest CPI report is released on Thursday, which will trigger volatility and is of vital importance to the market after heightened optimism over the past month.
- Altcoins could move violently on the report, while Bitcoin will likely break above its $18,000 mark if the data comes in below or above expectations.
Bitcoin has taken eight consecutive days of price increases as the new year kicked off with a stern start for cryptocurrency investors.
While 2022 has brought nothing but pain and plummeting prices, 2023 has so far been the exact opposite. Bitcoin breaks above the $18,000 mark and Ethereum finds itself close to $1,400, registering increases of 9.2% and 16.4% respectively since the start of the year. Many altcoins are even showing more upside.
Volatility Has Decreased in Cryptocurrency Markets
The macro climate is pushing prices higher. I wrote an article analyzing the milder climate last weekbut optimism has crept into the market that inflation may have peaked and the possibility of a Federal Reserve pivot on its high interest rate policy could come sooner than expected. .
It should be noted that while this is a nice rally, it is hardly a violent breakout. Cryptocurrencies are notoriously volatile and there has actually been a unusual serenity that has swept through the markets over the past two weeks.
A quick look at the Ethereum daily returns chart shows that there has been a noticeable drop in volatility.
Inflation data will be released on Thursday
I am writing this on Thursday morning, as the most important US inflation data will be released this afternoon. If we know anything now, it’s that inflation numbers rule the world. If there is anything in the current climate that will produce volatility, it is the CPI report.
As mentioned above, this relief rally was largely predicated on lower inflation, raising hopes that the Federal Reserve will exit its high interest rate policy sooner than expected. Another positive inflation figure would give further boost to cryptocurrency prices. It’s not hard to imagine Bitcoin surging towards $20,000 and Ethereum towards $1,500 if the number is colder than expected.
However, of course, there is the potential for the number to disappoint investors. After two consecutive months of positive inflation, a step back this afternoon would be a blow to the cryptocurrency, and it wouldn’t be surprising to see it fall sharply as all the optimism from the past month is released in a moment.
The inflation figure is expected at 6.5%. That would be down from the prior month of 7.1%. If the figure reached 6.7% or more, it would represent a major disappointment and the cryptocurrency would likely plummet. Don’t be surprised to see Bitcoin drop to $16,500 in this scenario.
The data will be released at 1:30 p.m. GMT (8:30 a.m. ET), and it’s the last CPI report ahead of the Federal Reserve’s interest rate decision on May 1.er february.
Altcoins showing signs of life
Whatever the bad things for Bitcoin and Ethereum, the landscape has been much worse for altcoins. Below are the 2022 return percentages of the top 10 coins as of January 1, 2022.
As usual, these coins are much more volatile and trade like leveraged bets on Bitcoin. It follows that this year the jumps have also been stronger than the number 1 cryptocurrency.
Looking at the top 10 coins from January 1 of this year, some of the returns have been seismic, albeit from a significantly lower base. Remember that a 90% drop followed by a 50% rise is still the same as an 85% drop from the original starting point. A simple math problem that many investors don’t understand. So the past two weeks have been positive, but it’s still a space that’s been absolutely ravaged by the bloodshed of 2022, and it’s going to take a very long time to recover.
This is a pivotal week for the markets and it will be a real indicator of the progress of the fight against inflation. Central banks have been adamant that inflation is the number one priority, and the resulting interest rate policy has crushed risky assets over the past year.
Things are tough in the markets, but with a third consecutive month of good inflation data, this could point to a light at the end of the tunnel. Again, the world is teetering on the brink of a recession as it is, and if inflation recedes, it will be a double whammy of high rates and still-persistent inflation. As always, risky assets will suffer.
Cryptocurrency investors will only have to hope that the pivotal CPI figure does not dare to exceed 6.5%.