US inflation brings Bitcoin down

Yesterday was a decidedly curious day in the financial markets, with US inflation continuing to affect the price of Bitcoin. 

Inflation in the US causes Bitcoin to plummet

Before the opening of the US stock exchanges, the new official figure for the inflation rate recorded in September in the United States was released. 

Since it had been 8.3% in August, a drop to at least 8.1% was expected, but instead, the drop stopped at 8.2%. 

Although inflation at 8.2% is not significantly different from one at 8.1% the markets immediately reacted badly. Within minutes after the release of the data, the Dollar Index sprang from 112.7 to over 113.7, while the price of Bitcoin fell from $18,700 to $18,100. Before that however, fearing a worse-than-expected inflation figure, it had dropped from $19,000 to $18,600. 

In reality, the fear was not so much related to the fact that the inflation figure had turned out to be slightly higher than expected, but to the increased likelihood of another sharp increase in interest rates by the Fed. 

Indeed, in recent days there had been widespread speculation, later proven incorrect, that the Fed might decide to make its current monetary policy a little less restrictive. Instead, the data yesterday disproved this assumption, but also indicated that such monetary policy might probably not become more restrictive. 

In short, the outlook yesterday remained “neutral,” so to speak, but many speculators previously thought (or hoped) that it might veer toward optimism instead. 

Such hope instead proved unwarranted, and in the short term the markets reacted badly. 

It is also worth adding that there were two other data points that completely disproved the optimistic hypothesis, namely an increase in industrial production costs, and especially the increase in core inflation net of food and energy. 

The picture that emerged yesterday is therefore not really neutral, but still slightly pessimistic. 

However, later in the day, having exhausted the blow from the denial of the slightly optimistic scenario, the markets recovered. Indeed, the fact that overall inflation in September still fell compared to August, albeit by a very small amount, produced a real turnaround. 

Bitcoin recovers with a V-turn

About two and a half hours after the drop that brought Bitcoin’s price down to $18,100, the price suddenly rebounded to $18,700, which is the same value from which the sudden drop resulting from the release of the inflation figure had started. 

On the other hand, shortly after rising above 113.7 points, the Dollar Index began a descent that lasted about two and a half hours and brought it back down to as low as 112.2, or well below the level from which the spike had started. 

Meanwhile, the US stock markets had first opened at a heavy loss (-3% for the Nasdaq), but then recovered to close the day with a sharp gain (+2% for the Nasdaq). 

The small upward run did not end with the closing of the US exchanges because the price of Bitcoin over the course of the evening and night first rose above $19,000, and then jumped to $19,800. 

So over the past seven days, Bitcoin first fell slowly from $20,000 to $18,900, then yesterday fell rapidly to $18,100 and then rebounded over the same day to $19,800. 

These movements on the one hand show how much the price of Bitcoin is now influenced by the macro conditions in the traditional financial markets, while on the other hand they reveal quite a lot of nervousness in this historical period in the financial markets themselves. 

September was also a particularly nervous month. 

CryptoCompare’s report on the crypto market

This was revealed in a recent report by CryptoCompare dedicated specifically to analyzing the crypto markets in September. 

Macroeconomic factors in particular weighed heavily on risk assets last month, including cryptocurrencies, of course. For example, despite a significant 30.4% increase in spot trading volumes of the BTC/USDT pair alone, the price of Bitcoin did not rise again. 

These volumes were generated in particular by selling, likely due to fear over the evolving macroeconomic situation, with a significant increase in fiat currency trading, especially in those areas of the world where the currency in use is not the US dollar. 

In contrast to this, spot trading volume on Coinbase fell 17.6%, hitting the lowest since January 2021. This is due to the fact that they increased on Binance, OKX and FTX instead. 

Another particularly interesting fact revealed by CryptoCompare’s report is the fact that in September, 93.6% of the total trading volume on spot crypto markets took place on large exchanges, or so-called “Top-Tier exchanges.” This is the highest market share since November 2017. 

This figure is interesting for two reasons. 

The first is that large institutional investors exclusively use large exchanges. So such a figure suggests that behind this high percentage there may be a particularly high activity of precisely the large institutional investors. 

In other words, given that September was a period marked particularly by sales, it is possible to imagine that several institutional investors may have decided to get rid of the cryptocurrencies still in their portfolios. 

However, given that over the course of the month the price of Bitcoin did not fall significantly, merely lateralizing generally below $20,000, it is also possible to imagine that below this price threshold many people decided to accumulate. Perhaps these included institutional investors, who perhaps took advantage of the fear and panic that may have led many retail people to sell. 

The other reason is that the apparent flight from small exchanges seems to show greater caution even on the part of retail investors, as if they have finally forgotten the illusions of easy gains that were spread enormously, and wrongly, during the great bullrun of 2021. Indeed, caution and big gains are often antitheses, since the biggest gains are generally made where there is the most risk instead. The shift to the large exchanges denotes a marked increase in prudence, and this suggests a kind of flight from risk and thus from hypothetical large gain opportunities.