The bitcoin price is crashing at the start of the US session after US Consumer Price Index inflation came in at the top of economists' forecasts.
Bitcoin is trading down 4.1% at $21,404 after a good run in which still leaves the price up 13% over the past seven days.🔭
As we reported earlier today, crypto traders were awaiting the inflation data before making their next moves.
After remaining unchanged in July, the US data for August saw prices increase 1% on a monthly view, dashing hopes that the rate might be stabilizing before starting to turn lower.
Bitcoin is not the great inflation hedge after all
Bitcoin was once touted as a hedge against inflation in the belief that its fixed supply would be looked upon favorably by investors looking to preserve their wealth from erosion by a general increase in prices.
Unfortunately, missing from that analysis was an appreciation of how bitcoin and crypto have come to be treated as high-risk stocks, with valuations moving in sync with tech stocks.
Tech stocks and crypto get thrown out of portfolios first
Higher-risk tech stocks are usually valued on the basis of future earnings – higher interest rates eat into those earning projections.
The correlation between tech stocks and crypto is kept in place by the fact that it is tech investors – usually of a younger demographic - that are most likely to also hold crypto.
When investors are looking to rebalance their portfolios by jettisoning riskier assets, tech stocks and crypto will be at the top of the list.
Returning to the latest inflation data, while the annual rate is slightly lower from July, at 8.3% now compared to 8.5 previously, that has done nothing to dampen the expectation that the U.S. Federal Reserve will continue with its aggressive interest rate hikes to curb inflationary pressures across the economy.
Core inflation came in ahead of expectations
The fall in crude oil prices in recent weeks accounts for the slight fall in soaring inflation compared to July.
However, core inflation, which excludes food and fuel cost was substantially above forecasts at 6.3%, when a reading of 6.1% was thought likely. The July figure was 5.9%.
The Fed makes its rates decision next week and another 75 basis points rise will be likely after Fed chairman said last week that it will act "forthrightly" to get a grip on prices.
Bitcoin price is still trading within range of recent months so need to panic
Bitcoin is currently trading 69% below its all-time high of $68,721.
On a three-month price view (see chart below) the leading digital asset is still very much in rangebound territory. Market watchers will now be looking to see how stocks react to the latest inflation data.
S&P500 futures are indicating a steep decline of 2% for the index when US equity markets open.
Even though bitcoin has lost its recently reclaimed $22k level, it will be the $20k market that is the most psychologically important level to hold.
Despite this latest setback then, there are indication from recent crypto price action that the market is nearing a bottom.
A number of factors, such as the deleverging events of the past few months suggest that a recovery in prices could be stirring.
Also, continued developments on the institutional front, with the latest reports of fund giant Fidelity opening up its 34 million retail brokerage accounts to bitcoin trading, are also encouraging.