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

As predicted yesterday, the latest consumer price index (CPI) turned in lower than the consensus estimate of 8.7%. July saw 8.5% CPI inflation, which is a welcome respite from June’s 9.1%. Both the crypto and stock markets reacted positively.

Bitcoin recovered its $1,000 loss and is now trading at $24,000. Likewise, Ethereum rose +9.5% to $1,847. The Nasdaq and S&P 500 had a more muted response, rising by nearly +2%, suggesting that the market has 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In the first half of July, the Biden administration called June’s inflation data “outdated.” Although this could have been interpreted as downplaying unfavorable data, we pointed out that this is most likely correct. Outside of the Fed flooding the economy with money to trigger inflation, the biggest driver of inflation is an increase in energy costs.

Despite the green narrative, by 2021, 90% of the transportation industry was dependent on petroleum products, according to the EIA. Correspondingly, almost half of the increase in inflation comes from this source, which was up annually by +41.6% in June. Since then, gas prices have fallen for nearly two months, as West Texas Intermediate (WTI) crude fell.

The latest CPI report for July noted that the gasoline index fell by -7.7%, in addition to the energy index falling by -4.6%. But considering that the annual cost of all energy is still up 32.9%, that momentum will need to be maintained. In practice, this means that the decline in petrol only neutralized some of the costs of food and shelter, as exemplified by continued rising household expenses.

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

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

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What’s ahead for the crypto market?

As risk-takers, the Fed destroyed the crypto market with every rate hike to curb inflation. The year began with a total crypto market cap of $2.18 trillion, after melting by -48%, to $1.13 trillion as of today. Bitcoin makes up 41.05% percent of that share, returning to January’s level of market dominance.

Ethereum is the main reason for Bitcoin’s decrease. Although BTC vs. Year-to-date ETH performance is minimal, at -49% vs – 51% respectively, the same cannot be said for last month. Over the past 30 days, Ethereum has outperformed Bitcoin by +40%, thanks to the hype surrounding the 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 for ESG investors concerned about energy footprints. Given the fact that Ethereum also has the largest and most trusted Web3 community, we can see Ethereum/Bitcoin spinning.

This also depends on the new crypto legislation, where Ethereum will fall under the CFTC as a commodity. Currently, the SEC only views Bitcoin as a commodity.

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

About the author

Tim Fries is the co-founder of The Tokenist. He has a B. Sc. in mechanical engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate in the investment team at RW Baird’s US Private Equity division and is also a co-founder of Protective Technologies Capital, an investment firm specializing in sensing, protection and control solutions.