Bitcoin investors experienced a brief surge in price following a report of a substantial slowdown in U.S. inflation. However, the upward trend did not last long, as Bitcoin’s price dropped below $30,500, representing a 1% decrease from the pre-Consumer Price Index (CPI) data release. The CPI revealed a 3% increase in consumer prices year-over-year in June, compared to a 4% gain in May. Furthermore, the core rate, excluding food and energy prices, decreased to a 4.8% increase after consistently remaining above 5% earlier in 2023.
The fading inflation risks were expected to provide support for Bitcoin, which has faced challenges due to rapid inflation since its peak near $70,000 in November 2021. However, this was not the case. This situation raises several issues that need to be examined.
Firstly, it could be seen as another instance of a misleading inflation trend during the Covid era. In 2021, the U.S. Federal Reserve referred to inflation as a transitory phase, dismissing the need for immediate action. Similar to the inflation reports in July and August 2021, today’s CPI data might not alter the Fed’s plans for additional rate hikes in 2023. This suggests that the initial optimism surrounding the CPI data may not have a lasting effect on Bitcoin’s price.
Secondly, alongside the CPI report, on-chain data indicated that 9,825 bitcoins ($301 million) from wallets linked to seized bitcoin holdings from the Silk Road marketplace were moved in three transactions. The selling pressure resulting from such transactions might counterbalance the positive impact of the inflation news.
Lastly, it could be argued that the market was already anticipating the slowdown in U.S. inflation. Bitcoin’s price had risen by over 20% since mid-June, with some attributing this growth to anticipation of an improved June inflation report. Observers had previously noted signs of softening in several CPI components, suggesting that the market had already factored in the positive impact on Bitcoin.
The frustration for Bitcoin bulls deepened as traditional markets appeared to fully embrace the weaker inflation report. The dollar index decreased by over 1%, which was expected as receding inflation concerns reduced the likelihood of future Fed rate hikes. Additionally, the 10-year Treasury yield dropped by 13 basis points (0.13%) to 3.84%, while the two-year yield experienced the same decline to 4.74%. In contrast, Bitcoin remained in decline on Wednesday, while the Nasdaq and S&P 500 saw gains of approximately 1%, reaching new all-time highs.
Although the news of the U.S. inflation slowdown should have provided some relief for Bitcoin investors, the subsequent market reaction and additional factors suggest a more complex and nuanced relationship between Bitcoin’s price and inflation trends. These developments highlight the dynamic nature of cryptocurrency markets and the multitude of factors that can influence their performance. So, even as inflation risks fade, Bitcoin remains stuck below $31,000.