Bitcoin, Ethereum Falter as Inflation Overshoots Expectations

Inflation continued accelerating in June after showing an increase in May, a potentially negative sign for crypto markets that have faltered as the Federal Reserve raises interest rates in response to soaring prices.

The Consumer Price Index (CPI), which tracks price movements across a broad range of goods and services, rose 9.1% in the 12 months through June, which is the largest 12-month increase in over 40 years, the Bureau of Labor Statistics (BLS) reported Wednesday.

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“This is one hell of a reading,” Torbjørn Bull Jenssen, CEO of crypto investment company Arcane, told Decrypt, based on the report overshooting analyst expectations of 8.8%. “Personally, I’m struggling to see how we are not going to end up with a recession.”

The largest monthly gains for the index came from food, shelter, and the price of gasoline. The energy index spiked a whopping 7.5% on a month-to-month basis and accounted for nearly half of the gains to headline inflation in June, compared to increasing 3.9% in May. 

The price of energy for consumers has risen by 41% in the past year, and electricity has become nearly 14% more expensive in the 12 months through June, indicating the largest yearly increase since 2006. 

Rising electricity prices have also compounded the pain experienced by mining operations amid a market crash.

“Energy prices, coupled with falling Bitcoin prices and increased competition, have weighed heavily on crypto miners, which have seen their operating costs surge,” Dessislava Aubert, an analyst at digital assets data provider Kaiko told Decrypt, referencing recent moves from miners to sell some of their stashes of digital currencies. “The selling is likely to increase as market conditions remain challenging, this will also put some short-term downward pressures on BTC prices.”

Rate hikes on the horizon

Last month, the Fed raised interest rates by 75 basis points, delivering its steepest rate hike since 1994 in partial response to inflation readings from May. 

Today’s inflation report will likely cement its ambitions to deliver another rate hike of 75 basis points later this month, as it tries to rein in inflation aggressively by making it more costly to borrow, thus cooling the economy.

“Institutions often live by the motto of ‘don’t fight the Fed,’” said Mike Boroughs, managing partner for blockchain investor Fortis Digital Ventures. “If the Fed is going to have to get more aggressive, it will likely lengthen the time before institutions begin to heavily accumulate crypto.”

Rising interest rates have made stocks and other risky assets less attractive when compared to corporate bonds and U.S. treasuries, which have lower yields but are backed by the government in terms of gains. They are considered among the safest investments, and that’s leading institutions to divest from cryptocurrencies.

“In order for this space to rebound, it’s going to have to be done by Wall Street,” Edward Moya, Senior Market Analyst at OANDA, told Decrypt. 

Moya noted that retail investors were nonetheless extremely confident over the past three years but have recently suffered heavy losses and “been rocked” financially.

Cryptocurrencies react to inflation report

Following the CPI report’s release, cryptocurrency markets tumbled. 

The price of Bitcoin dropped upwards of 4% in the hour after the inflation report’s release and Ethereum fell by over 6%, extending weekly losses for the second largest cryptocurrency past 10%, according to CoinMarketCap. 

At one point, the inflation report pushed Bitcoin down by as much as 6%.

Other coins with less market cap took similar hits. Cardano, Solana, Polkadot, and Dogecoin posted daily losses upwards of 5%, while Uniswap toppled 6.7% and Polygon’s MATIC plunged 7.4%, according to CoinMarketCap. 

Bill Noble, senior market analyst at Token Metrics, a crypto investment research firm, said altcoins require a continuous flow of money to maintain their market caps and are less likely to see that amid periods of broader selling.

“If the market goes down, some of these altcoins can, in terms of price, disappear or they have to be totally repriced for a lack of demand,” he told Decrypt. “In other words, there’s no natural buyer, there’s just retail and [venture capital] selling.”

Noble believes the inflation report will inspire panic among cryptocurrency markets, as investors are forced to sell under financial distress and liquidation pressure from creditors further manifest, with companies like Celsius Network, Three Arrows Capital, and Voyager Digital.

“[Investors] may not want to sell Bitcoin below 20k–they may have to–just to try to recoup whatever losses they got from lending money to these various crypto characters,” Noble told Decrypt. “This inflation number and mass liquidation may inspire the most incredible fear we’ve seen since 2008 or 1929.”