Investors appear hesitant to make aggressive bets as they await the US Consumer Price Index (CPI) data, scheduled for release at 8:30 PM tonight. This critical inflation report is expected to influence expectations regarding the future path of US interest rate hikes.
If the Wall Street consensus, as measured by Dow Jones, is accurate, the closely watched CPI will show a month-on-month increase of 0.2% for July, with the annual rate rising just 3.3%. This pales in comparison to the 8.5% annual CPI growth rate seen a year ago, which was near a four-decade high.
The general market expectation is that while the pace of price increases has slowed, it is not enough for the Federal Reserve to back down from its fight against inflation. Mark Zandi, Chief Economist at Moody's Analytics, noted, "We can be confident that inflation is moving in the right direction, but we shouldn't be overconfident."
The Connection Between Crypto and CPI
Cryptocurrencies and the US CPI share some indirect links and influences. Specifically, CPI data can spill over into the crypto space, as evidence suggests a correlation with broader market volatility, often measured by the VIX index. Consequently, Bitcoin bulls are also hoping for positive news from the CPI report.
Over the past month, the crypto market has been exceptionally quiet, with metrics measuring Bitcoin's price volatility hitting record lows. Data shows that Bitcoin's 30-day volatility has approached 20 points after a significant decline. Historically, this metric has spent only 2% of the time below 20 points over the past decade.
As a result, market liquidity has gradually shifted from BTC and ETH to altcoins with higher volatility. However, due to the recent emergence of numerous volatile altcoins that have aggressively absorbed the market's remaining funds, many retail investors are no longer able to participate in trading, further reducing market liquidity.
Technical Indicators Suggest a Change
Based on historical data and technical indicators, Bitcoin appears to be emerging from this period of unusually low volatility. Currently, Bitcoin is forming a falling wedge pattern, similar to the precursor to the rally in June. Analysts typically interpret a falling wedge as a bullish signal.
Tony Sycamore, a Market Analyst at IG Australia Pty, stated, "We have shifted to a positive preference for Bitcoin. Technical indicators suggest that Bitcoin has the potential to rise to $34,000."
Terrence Yang, Managing Director of Swan Bitcoin, added, "Given Bitcoin's asymmetric upside and the imminent influx of funds into US spot Bitcoin ETFs, Bitcoin is significantly undervalued at present."
The Potential Impact of Spot Bitcoin ETFs
Bendik Schei, Head of Research at cryptocurrency firm K33 Research, mentioned, "The upcoming spot Bitcoin ETF could disrupt the recent sluggish phase of the crypto market."
August 13 is the deadline for the US Securities and Exchange Commission (SEC) to respond to ARK Investment Management's application for a spot Bitcoin ETF. Whether the SEC delays, rejects, or approves ARK's application could trigger market volatility.
Contacts within BlackRock and Invesco have revealed that approval for a spot Bitcoin ETF might occur within four to six months. It is not a matter of if but when. Cathie Wood, CEO and Founder of ARK Investment Management, stated in an interview that if the SEC approves a Bitcoin ETF, it will likely approve multiple ETFs simultaneously.
Underlying Risks Remain
Despite the positive indicators, the crypto market still faces several underlying risks. Issues such as the Huobi incident, the aftermath of CRV, and rumors of increased regulatory scrutiny in certain regions warrant attention. Recently, global payment giant PayPal announced the launch of a USD-backed stablecoin, which may seem bullish. However, the US government and financial institutions might not merely participate as neutral players but could seek to exert control. It is worth noting that Tether, a major stablecoin issuer, holds a significant proportion of US debt. To protect its interests, the US has likely made ample preparations regarding stablecoins.
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Conclusion
Given the certain correlation between cryptocurrencies and inflation, crypto bulls are hoping for positive news from tonight's CPI report. However, crypto market volatility is primarily influenced by market supply and demand, regulatory policies, market sentiment, technological innovations, and other factors, not solely determined by CPI data. Therefore, investors should consider multiple factors and adopt comprehensive risk management strategies when investing in cryptocurrencies.
Frequently Asked Questions
What is the US CPI and why does it matter for crypto?
The US Consumer Price Index (CPI) measures inflation by tracking the average change in prices paid by consumers for goods and services. It matters for crypto because inflation data can influence Federal Reserve policy, which affects investor sentiment and market volatility, indirectly impacting cryptocurrency prices.
How does Bitcoin's volatility compare to traditional markets?
Bitcoin's volatility is often higher than that of traditional assets like stocks or bonds. However, during certain periods, such as recently, it can drop to unusually low levels, which may indicate an impending significant price move.
What is a spot Bitcoin ETF and how could it affect the market?
A spot Bitcoin ETF is an exchange-traded fund that holds actual Bitcoin, allowing investors to gain exposure without directly owning the cryptocurrency. Its approval could bring substantial institutional investment, increasing liquidity and potentially driving up prices.
What are the main risks facing the crypto market now?
Key risks include regulatory uncertainty, market manipulation, technological vulnerabilities, and macroeconomic factors like inflation and interest rate changes. Recent events involving exchanges and stablecoins also add to the volatility.
How can investors manage risk in such a volatile market?
Investors can manage risk by diversifying their portfolio, using stop-loss orders, staying informed about market trends, and only investing funds they can afford to lose. A long-term perspective and thorough research are also crucial.
Are stablecoins like PayPal's new offering safe?
While stablecoins are designed to maintain a stable value, they are not without risks. These include regulatory challenges, reserve transparency, and potential issuer instability. It's essential to research the backing and governance of any stablecoin before use.