Bitcoin (BTC) stopped its last rally on Thursday, falling 5% to $39,600 as traders took a cautious stance on US inflation data expected to show a huge spike in consumer prices through February. Most of the top altcoins also fell in line with the token.
U.S. consumer prices rose 7.9% last month, according to Reuters, the fastest pace in nearly 40 years. The trend of rising inflation has been negative for BTC in recent months, due to its tendency to behave like a risk-driven asset. For example, the token had fallen by almost 5% in response to the inflation reading in January, which showed that prices had risen by 7.5%.
And since the token acts as a whistleblower for the crypto market, most major altcoins fell in line. For the day, the top 10 altcoins, including Ethereum, XRP and Cardano, fell between 1.5% and 5%. The total crypto market cap decreased by $80 billion from yesterday.
Despite recent data suggesting that Bitcoin has diverged slightly from the stock market, today’s decline indicates it is far from decoupled. The currency has also severely lagged the gold price this year, leading many to question BTC’s viability as an inflation hedge.
While BTC is down about 40% this year, gold is trading up 10%. Still, the US government sent a positive signal to the crypto market on Wednesday with the prospect of crypto-friendly regulation.
Economic sanctions against Russia to drive up inflation
Recent sanctions against Russia over its invasion of Ukraine are likely to push inflation this year, although today’s reading, expected at 8:30 a.m. ET, is unlikely to reflect the impact. But sanctions on Russian oil have pushed up energy prices, while disruptions in Ukraine’s wheat exports will push up food prices – both key factors in inflation.
Rising food and energy prices will impact retailers’ ability to invest in cryptocurrencies, impacting BTC’s outlook for the year. There is also speculation that rising costs could lead to a recession this year – an extremely unfavorable environment for risk-driven assets.
Inflation drives interest rate hikes
Inflation is a key factor considered by the Federal Reserve when raising interest rates. The central bank is set to raise interest rates next week, for the first time in more than two years, as it struggles to deal with recent price increases. But this move will also be negative for BTC as it reduces the amount of liquidity in the market.
Increased liquidity was a key factor in Bitcoin’s great rally in 2021, as ultra-low lending rates allowed traders to seek better returns in cryptocurrencies. But a drastic rise in inflation, especially since the second half of 2021, has slowly undermined this rally.
Disclaimer
The content presented may contain the personal opinion of the author and is subject to market conditions. Do your market research before investing in cryptocurrencies. The author or publication is not responsible for your personal financial loss.
About the author
With over five years of experience in global financial markets, Ambar plans to leverage this knowledge for the fast-growing world of crypto and DeFi. His main interest lies in finding out how geopolitical developments could affect crypto markets and what that could mean for your bitcoin holdings. When he’s not scouring the internet for the latest news, you can play him video games or watch Seinfeld reruns. You can reach him at [email protected]
This post Bitcoin (BTC) Drops Below $40k Ahead of Red-hot US Inflation
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