Prices of bitcoin and ETH rise as Inflation falls

[TL; DR]

Changes in inflation rate affected the price of BTC and ETH in June and July.

In July, the price of BTC and ETH increased following the fall in the year-to-year inflation rate.

When the inflation rate increased in June, the prices of BTC and ETH fell.

Usually, when the inflation rate rises the Federal Reserve tightens its monetary policy.

Introduction

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The performance of economies such as the United States affects prices of bitcoin and other cryptocurrencies. Changes in macroeconomic events in the world have influence on BTC and ETH because these are decentralized assets. Also, the health state of the global economy determines the amount of funds investors put into cryptocurrencies and other investment assets.

During periods of economic expansions people set aside more resources for investment. On the other hand, during recessionary periods, they cut their allocations to long term investments. This is because they use a greater proportion of their earnings to meet their daily needs. In the same vein, recent events seem to indicate that the level of inflation and interest rates influence the values of cryptocurrencies such as BTC and ETH.

The Value of ETH and BTC increased in July

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The values of bitcoin and ETH increased within hours after the Fed announced its Consumer Price Index (CPI). The July year-on-year consumer price index, which represents the rate of inflation, rose by 8.5%. This was a lower rate than what the cross section of investors expected for the period, following an increase of 9.1% in June. However, the month-on-month inflation rate did not change from that of June.


Since the lower than expected inflation rate puts less pressure on the Federal Reserve to raise the Fed fund rate (interest rate) in September, the crypto market responded positively as prices of most cryptocurrencies increased significantly.

The price of BTC increased by 2% and that of ETH by 7% after the Bureau Labour Statistics announced the CPI. The reason for the rallying of most cryptocurrencies is that the market expected the Federal Reserve to relax its current tight monetary terms. Within the next 24 hours the value of BTC rose above $24 000 while that of ETH rose from 1,710 to USD 1,820. In a similar manner, prices of many altcoins increased.
However, something worth noting took place a few hours before the announcement of the CPI. The price of BTC fell by about 4% to $23, 100 while that of ETH decreased by over a 5% margin.

Responding to the July crypto rallies, the cryptocurrency educator at Prosper Trading Academy, Howard Greenberg, said, “I think the market will continue to find confidence in the Fed staying on track with its proposed increases to the interest rates at the September meeting and we will continue to see our relief rally pick up steam in the crypto market.”


In the meantime, economic experts believe that the Federal Reserve will hike the Fed rate by a smaller margin than before. For instance, the head of fixed-interest research at Quilter Cheviot (UK), Richard Carter, said, “They will still need to hike rates at their next meeting in September, but this reduces the risk of another 75 basis-point move and, going forward, we might just see markets act a little calmer than they have to date.”

The crypto market situation in June

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It is beyond doubt that the crypto market has been very inconsistent this year as a result of changes in macroeconomic fundamentals such as inflation and interest. Whereas July experienced an upward price movement, the opposite was true ofJune.

The crypto market in June witnessed weak bullish breakouts within a mostly bearish market. Some crypto analysts think that the inflation in June triggered a downward spiral of BTC price to a point below $19 000 at certain times.

As usual, when the price of BTC tumbles the values of other cryptocurrencies follow suit. For example, Uniswap, Cardano, Solana, Polkadot, Matic, and Dogecoin had losses of between 5% and 7.4%.


A senior market analyst at Token Metrics, Bill Noble told Decrypt that if inflation rises altcoins suffer the most. He said, “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. The reason is that “there's no natural buyer, there's just retail and [venture capital] selling.”

Now, one premise a section of the market holds is that price reversals arising from reports on inflation and interest rates are temporal in nature.This is because the crypto prices always bounce back to their previous levels.

However other crypto experts say that when the prices of cryptocurrencies fall because of a rise in inflation or interest rate, it may take much time before they trace back to their expected prices. According to Coinbase, an analyst at digital asset broker GlobalBlock, Marcus Sotiriou said, “A major bitcoin bottom signal for me is when we see data showing us that inflation is convincingly inflecting down.” He added that, “I would be cautious until inflation starts to come down, as we have learned that the Federal Reserve is king when it comes to risk assets like crypto, and the pain of quantitative tightening could drag on for many more months.”

Is BTC a hedge against Inflation?

The fact that the price of BTC responds to changes in inflation or interest rates creates a new impression. From the time the BTC trend correlates with that of the stock market indications are that it is responding to changes in macroeconomic variables such as inflation and interest rates. The BTC price movements in both June and July confirm that.

Conclusion

In June, the price of bitcoin dropped following the announcement of the rise of the consumer price index. On the other hand, in July the price of BTC and ETH rose soon after the news that the year-to-year inflation has fallen. The prices of most altcoins responded in similar ways both in June and July. However, the rallying of ETH was partly due to the hype about the coming Merger and the London Hard Fork.




Author: Mashell C., Gate.io Researcher
This article represents only the views of the researcher and does not constitute any investment suggestions.
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