The Fed Killed Crypto? How has CPI Impacted the Crypto Markets?
Are central bank interest rate raises having any further dampening effect on the cryptocurrency markets or are they priced in..
It’s strange times, stocks crashing, housing crashing, crypto crashing, precious metals falling. At the same time, fiat currency is falling in value relative to our daily necessities like gas, food and travel. For investors, it seems like there’s no safe haven…
Everyones been feeling the pinch of rising prices, last week Jonty at the club told me he laid off 2 butlers and a footman! I’ve noticed my gardener bringing his own sandwiches to work and my family accountant told me the fuel bill for our G7 is up 30% this month and we might need to slash our entertaining expenses! Looks like we might have to settle for Verbier this winter and mothball the yacht.
On top of all this doom and gloom, our precious cryptos are languishing in the doldrums. When I called Vitalik to ask him what was going on he said he didn’t know, all he could say was sorry. Worthless apologies aside, why is it that the asset class that was supposed to be the antithesis of inflationary fiat currency, is actually performing worse than those very fiat currencies in this environment of high inflation?
99% of crypto holders are average everyday people with families they have to support, jobs they need to get to and bills they have to pay. They save and invest what they can, but when the price of rent and food goes up by 30% they are faced with a tough choice.
They can either try to find additional income from somewhere, or they can liquidate some of their investments and savings to cover the shortfall. The latest consumer spending data from the Australian Bureau of Statistics shows household spending was 7.9 percent higher in May than it was a year earlier.
For most families, cryptocurrency isn’t something they can eat or fill up their car with, so it’s the first to be liquidated in this uncertain economic climate
The economic disruption surrounding the covid19 pandemic, supply chain shocks and Russia's war in Ukraine have contributed to a very gloomy picture for the growth in recent months. Central banks seem to be trapped between a rock and a hard place with regard to monetary policy. Raising interest rates to try to curb inflation risks a general market crash, while carrying on as before would mean historic inflation levels.
10 year Fed interest rates- tradingeconomics.com
The Fed has chosen to raise rates by 1.5% this year, with predictable effects on stocks and asset prices.
Is the Pain over?
The answer is No. If we look at the Fed interest rates chart, you can see it’s been a lot higher historically. Is inflation abating? Gas prices have come down slightly in recent days so it looks like the policy is having some effect, but globally central banks appear to be increasing interest rates even harder than the Fed. Canada's central bank recently raised rates by 1 whole percent! And Covid19 issues seem to be receding, but the war in Ukraine is still ongoing and it remains to be seen how it will develop. The issue of gas supplies to Germany could become a pain point this winter.
Blood in the Streets
For crypto holders, the past few months have been terrible, but for traders, volatility in any direction is great for profits. The interest rates announcements and CPI figures releases have been a bonanza for shorts.
All said, the CPI data appears to present downside risks to cryptocurrency prices. An upside inflation surprise would result in an upping of Fed belt tightening that would, like back in June, likely weigh heavily on risk assets like stocks and crypto.
A big surprise reduction would probably be needed to boost crypto. PCE inflation data, an alternative US inflation measure preferred by the Fed, released in June a few weeks after the CPI data saw its core measure fall to a six-month low. This contributed to hopes that US price pressures might have already peaked.
Traders will therefore be watching the numbers in upcoming CPI reports for further evidence of so-called peak inflation. Bitcoin is a real macro asset now, and things that happen in the broader economy affect the crypto markets. Crypto offers a way to opt out of the traditional financial system for some, but for now their fates are tied together.
Aside from interest rates, the big crypto bankruptcies of Celsius and Bancor seem to be being resolved. At the time of writing, Ethereum rose 40% in the past week from its earlier lows to $1500, and Bitcoin is up 12% in the same time frame. It does feel as though the market has already priced in any further interest rate announcements and now could be a great time to cautiously go long on the crypto market. (Not Financial advice!!)
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