Bitcoin Gains on Optimistic CPI Print, But Will a Rally Follow?

As forecasted yesterday, the latest Consumer Price Index (CPI) turned lower than the estimated consensus of 8.7%. July saw an 8.5% CPI inflation rate, which is a welcome reprieve from June’s 9.1%. Both crypto and stock markets reacted favorably.

Bitcoin regained its $1k loss, now trading at $24k. Likewise, Ethereum went up by +9.5%, at $1,847. Nasdaq and S&P 500 had a more muted response, going up by nearly +2%, suggesting that the market already priced in a favorable CPI forecast.

Why Did Inflation Go Down?

In the first half of July, the Biden administration called June’s inflation data “out-of-date”. Although this could’ve been construed as downplaying unfavorable data, we pointed out that this is most likely correct. Outside the Fed flooding the economy with money to trigger inflation, the biggest inflation driver is an increase in energy costs. 

Despite the green narrative, in 2021, 90% of the transport industry relied on petroleum products, according to EIA. Correspondingly, nearly half of the inflation increase comes from that source, which was annually up by +41.6% in June. Since then, gas prices have been falling for nearly two months, as the West Texas Intermediate (WTI) crude oil went down.

The latest CPI report for July noted that the gasoline index dropped by -7.7%, in addition to the energy index dropping by -4.6%. However, considering that annualized all-energy cost is still up by 32.9%, that momentum will have to be sustained. Effectively, this means that the decrease in gasoline merely neutralized some of the food and shelter costs, as exemplified by still rising household expenditures.

Lastly, the inflation rate went down due to the dollar becoming much stronger compared to the euro. Yesterday, we showed how deeply Europe self-sanctioned itself when it sanctioned Russia. Because the Dollar Strength Index (DXY) is weighted against the euro at 57.6%, this topped DXY at a 20-year high, simultaneously as the euro dropped to a 20-year low.

Without the dollar enjoying its global reserve currency status, inflation would most likely already be in hyper-inflation territory. As things stand now, the Fed should restrain from spooking the market with even larger rate hikes, which is why the market’s reaction was positive.

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What Is Ahead for the Crypto Market?

As risk-on assets, the Fed devastated the crypto market with each interest rate hike to curb inflation. The year began with a total crypto market cap at $2.18 trillion, having since melted by -48%, at $1.13 trillion as of today. Bitcoin makes 41.05% percent of that share, returning to January’s level of market dominance.

Ethereum is the main culprit for Bitcoin’s reduction. Although the year-to-date BTC vs. ETH performance is minuscule, at -49% vs – 51% respectively, the same cannot be said for last month. During the last 30 days, Ethereum outperformed Bitcoin by +40%, thanks to the hype surrounding its upcoming Merge upgrade in September. 

Ethereum’s proof-of-work to proof-of-stake milestone could be a turning point for the crypto market, opening the floodgates to ESG investors concerned about energy footprints. Given the fact that Ethereum also has the largest and most reliable Web3 community, we could be looking at Ethereum/Bitcoin flippening. 

This also depends on the new crypto legislation, by which Ethereum would fall under CFTC as a commodity. Presently, the SEC only views Bitcoin as a commodity.

The Surge is yet to scale up Ethereum after the Merge, late next year. Do you think Ethereum will still hold its dApp-host dominance? Let us know in the comments below.