Macro matters, The Merge and bitcoin back above $22,000: This week in markets

Bitcoin hit a three-week high on Monday as the leading cryptocurrency by market cap soared more than 11%.

Bitcoin was up 11.6% at $22,282 over the past week ahead of inflation data in the U.S. on Tuesday. Elsewhere, ether gained more than 9.4% and was trading at $1,715.

Inflation data out of the U.S. will be the main focus on Tuesday. A Reuters poll of analysts anticipate a reading of 8.1% year on year, down from the 8.5% in July.

Following that, all eyes will be on The Merge as Ethereum is finally set to move to proof of stake this week, currently expected to happen around 3 a.m. ET on Thursday – though it’s subject to change. Ether derivatives have soared over the past few weeks as investors bet on the transition. 

Inflation in focus

Jonah Van Bourg, global head of trading at Cumberland, told The Block on Monday that it’s telling how closely the crypto ecosystem is watching the CPI print this week. 

source: www.bls.gov/cpi/

“It underscores how intertwined crypto has become with other risk assets, which is requiring crypto market participants to become more sophisticated in understanding those correlations,” Van Bourg said. “While commodity prices have eased in recent weeks, an inflationary surprise to the upside could negatively affect crypto prices,” he concluded.

CPI reports have become an important short-term driver for bitcoin and other cryptocurrencies, according to Trakx crypto economist Ryan Shea. He attributed the increased relevance of the inflation data to the Fed’s reaction function changing in light of the “failure to predict the persistence of inflation and amid concern about possible second-round effects.”

Shea said big question is how much economic pain the Fed is prepared to risk in order to bring inflation back down to their 2% goal. Assuming inflation continues its downward trend, it will show that price increases have peaked.

“As such, there would be little to challenge the perception that the Fed tightening cycle will end sometime in Q1 next year with a terminal Funds rate at or around 4%,” Shea said.  This should help maintain the recent short-term positive price momentum.”

FTX founder Sam Bankman-Fried said the dollar dominance and inflation has affected crypto markets this year. Speaking at SALT on Monday, SBF said dollars are up and that this is “the year of policy change,” noting that monetary policy and inflation are the primary price drivers in crypto this year. 

Indeed the DXY Dollar index recently reached a two-decade high of $110.79.

DXY is a measure of the value of the U.S. dollar relative to a basket of other foreign currencies, it was established shortly after the Bretton Woods Agreement dissolved in 1973. It has a base of 100, and the values since then are relative to this base figure.

The Merge 

Ethereum’s long-awaited upgrade known as The Merge is set to be completed on Thursday, Sept. 15.

The Merge is one of the biggest technological changes to ever happen in the blockchain space and has been in the works, in a way, since 2015. When it takes place, it will move Ethereum to a proof-of-stake blockchain, reducing its environmental impact and changing some of its tokenomics.

The Ethereum website describes The Merge using the analogy of a spaceship that isn’t quite ready for an interstellar voyage.

“With the Beacon Chain, the community has built a new engine and a hardened hull. After significant testing, it’s almost time to hot-swap the new engine for the old mid-flight. This will merge the new, more efficient engine into the existing ship, ready to put in some serious lightyears and take on the universe.

For a more detailed exploration of The Merge, check out Vishal Chawla’s piece here. 

Traders have been taking bets on ether in the lead up to the upgrade, with derivatives soaring throughout the month of August. Open interest in ether options surpassed bitcoin open interest for the first time in August and for the first time the volume of ether futures overtook bitcoin futures, during August.

However, crypto asset manager CoinShares noted in its weekly fund flows report on Monday that Ethereum was the primary focus of outflows last week.

The outflow come despite the improved certainty of The Merge, expected on or about October 15, and perhaps highlights “concern amongst investors that the event might not go as planned.” Although, the fund said it doesn’t expect there will be any issues with the upgrade. 

This came as digital asset investment products saw outflows totalling $63 million, in what was the fifth consecutive of outflows.

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