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Crypto prices have collapsed in 2022.
Dusan Zidar/DreamstimeBitcoin and other cryptocurrencies dropped on Wednesday after investor sentiment soured following the release of key U.S. inflation data.
The price of Bitcoin is 4% over the past 24 hours to $19,200, having previously been edging higher, approaching the $20,000 level that it plunged though on Tuesday. The largest crypto made significant gains with a rally into last weekend, changing hands as high as $22,000, but has since fallen back.
U.S. consumer-price index data revealed year-over-year inflation at a red-hot 9.1%—firmly ahead of the 8.8% figure expected by the market and the highest level in four decades. The CPI data are key because of how central the risk of recession has been to the selloff in stocks in 2022, which has plunged both the S&P 500 and tech-heavy Nasdaq into a bear market and heaped pressure on cryptos.
Facing the highest inflation in decades, the Federal Reserve has already moved aggressively to tighten monetary policy, and is expected to continue doing so as long as prices remain hot. The fear in markets is that this could dent demand to the point of causing a recession, which would be trouble for risky bets like Bitcoin.
The higher-than-expected CPI number has likely spooked investors by raising the prospect of a more severe Fed. In any case, the release sent stocks lower on Wednesday, blazing the trail for digital assets to follow. While cryptos should, in theory, trade as uncorrelated assets, Bitcoin and its peers have shown themselves to move in line with stocks, and especially tech stocks.
“Markets keep expecting a peak in inflation, and keep getting disappointed,” said David Donabedia, the chief investment officer at CIBC Private Wealth. “This likely means 75 basis point moves at both the July and September [Fed] meetings … There is nothing positive for markets in this report.”
But at least one analyst believes the downside for Bitcoin could be muted because investors had been expecting a higher CPI number.
“The market has been pricing in high inflation numbers this week, so a downside for Bitcoin may be limited than previously expected. However, we cannot be too optimistic,” Yuya Hasegawa, an analyst at crypto exchange Bitbank, said ahead of the CPI release.
However, from a technical perspective, it is possible that continued bad news could drive a more painful selloff in cryptos.
Katie Stockton, the managing partner at technical research group Fairlead Strategies, said Tuesday that Bitcoin’s downside momentum was growing stronger, with a growing likelihood that prices would test support as low as $18,300. Even that level would remain above Bitcoin’s recent bottom, below $18,000, reached in the trough of a selloff in June.
Beyond Bitcoin, much of the crypto space was shaping up similarly. Ether, the second-largest digital asset, tumbled 4% and was holding above $1,000. Among smaller cryptos, or altcoins, Solana and Cardano each fell 5%. Memecoins—initially intended as internet jokes—were moving in step, with Dogecoin and Shiba Inu 4% and 5% in the red, respectively.
Along with macro factors, cracks in the crypto industry itself have exacerbated recent price declines, including the meltdown of the stablecoin Terra and the failure of the hedge fund Three Arrows Capital. Bitcoin continues to trade at less than one-third its record level, reached iin November 2021, and just capped its worst quarter in more than 10 years.
Write to Jack Denton at [email protected]
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