Impact of CPI and Various Economic Indicators on the Cryptocurrency Market
The crypto space alone has been filled with so many activities. With the scheduled release of the Consumer Price Index (CPI) and other economic activities, it is imperative for us to review the effect these announcements and activities can have on the crypto market. This is important at a time when there is a high drive for cryptocurrency adoption and web3. There have been so many speculations on the market, with many companies and individuals adopting the web3 ecosystem while some are still arguing about its credibility. You will note that there has been a downturn in the crypto market since September last year, and while we will soon enter the last quarter of the 2022 calendar year, it will be important that we see positive growth in the market.
First, let us take a look at the Ethereum Merger and what different people have been saying about that merger.
The Ethereum Merger
There have been so many reports and analysis about the Ethereum merger, and so many debates going on about how this will affect the crypto market. According to one of our articles titled Things you need to know about the Ethereum 'Merge', “The merge will be this Beacon Chain, which will validate the ETH network's blocks, and it will be from this version that Ethereum will transition to Proof-of-Stake. Even after this, there will be several steps before arriving at the "final version" of ETH 2.0, but "The Merge" will be a significant step forward because it will mark the end of the proof-of-work based protocol on which ETH has been based since its inception”. Simply put, Ethereum is going to adopt the Proof-of-Stake mechanism. Proof-of-stake is a cryptocurrency consensus mechanism that is used to process transactions and add new blocks to a blockchain. A consensus mechanism is a method for validating and securing entries in a distributed database. The database in the case of cryptocurrency is called a blockchain, so the consensus mechanism secures the blockchain.
This merger announcement did not come without some misconceptions, let us take a look at some of these misconceptions.
After the Merge, Ethereum gas fees will be reduced.
One of the most common misconceptions among investors is that Ethereum's upcoming upgrade will reduce the infamous gas fees (transaction fees).
While lower gas fees are at the top of every investor's wish list, The Merge is a consensus mechanism change that will transition the Ethereum blockchain from proof-of-work to proof-of-stake (PoS). Instead, lowering Ethereum gas fees will necessitate increased network capacity and throughput. To reduce transaction costs, the developer community is currently working on a rollup-centric roadmap.
After The Merge, Ethereum transactions will be faster.
Ethereum transactions will most likely not be noticeably faster. However, there is some truth to this rumor, as Beacon Chain allows validators to publish a block every 12 seconds, which is approximately 13.3 seconds on the mainnet. While Ethereum developers believe that switching to PoS will result in a 10% increase in block production, users are unlikely to notice the slight improvement.
The Merge will cause the Ethereum blockchain to go down.
In contrast to the popular belief that The Merge will result in positive outcomes for Ethereum, a popular rumor claims that the planned upgrade will temporarily bring the Ethereum blockchain down. The developers anticipate no downtime as the blocks transition from PoW to PoS construction.
After The Merge, investors will be able to withdraw their staked ETH.
Staked ETH (stETH), a cryptocurrency backed by Ether (ETH) 1:1, is currently locked on the Beacon Chain. Users would like to be able to withdraw their stETH holdings, but the developer community has confirmed that the upgrade does not allow for this. Withdrawal of stETH holdings will be available during the Shanghai upgrade, the next major upgrade following The Merge. As a result, the assets will be locked and inaccessible for at least 6-12 months following the merger.
Validators will be unable to withdraw ETH rewards until the Shanghai upgrade is completed.
While investors will be unable to withdraw stETH until after the Shanghai upgrade, validators will have immediate access to the fee rewards and maximal extractable value (MEV) earned during block proposals from the execution layer or Ethereum mainnet. Because the fee compensation will not be new tokens, it will be available to the validators right away.
These misconceptions are normal as the buzz surrounding Ethereum's upcoming upgrade, the Merge, which involves the merger of two blockchains — mainnet Ethereum and Beacon Chain — has unintentionally spread rumors throughout the community.
"I am completely confident that it will go well," Ben Edgington, global product lead for ConsenSys' institutional Ethereum staking service Teku, told CoinDesk. "Every testnet Merge we've done and every test scenario we've run in the last six months has met these Merge criteria."
The hype surrounding the merger has helped ETH, the blockchain's native token, surge to $2,000 over the weekend, up from around $1,000 a month ago.
"Right now, different actors are betting on whether or not the Merge occurs, as a sentiment bet," said Lex Sokolin, ConsenSys' head economist.
"If that happens, we'll be in a new regime."
If this merger goes well, there could be a positive increase in the price of Ethereum, will this positive or negative increase also have an effect on other crypto coins?
Now, let us take a break from the Ethereum merger and look at the Solana hack.
The Solana Hack
In one of the most recent cyberattacks, hackers broke into scores of Solana hot wallets and stole $8 million, reigniting concerns about the safety of cryptocurrency transactions online.
The audacious Solana cyberattack highlights the need for improved digital security.
To reduce online threats, experts now recommend using a hardware wallet or a centralized crypto exchange wallet.
Solana (SOL) bills itself as an eco-friendly blockchain that uses less energy per transaction than Google does for two searches. SOL validates transactions in its blockchain using a proof of stake consensus mechanism. The Ethereum blockchain, like Solana, is expected to transition to a proof of stake protocol from the current proof of work mechanism next month. Although the exact time of the Solana attack is unknown, it is believed to have occurred at late night ò August 2 (IST).
Wade Green, a Solana community member, told Indian Express that everything was normal until that day. The previous night, he even used his 'Phantom' Solana-based crypto wallet to make transactions. However, he later discovered that his funds had been wiped clean and that the hackers had made off with approximately $10,000 in SOL.
How much money were the hackers able to steal?
According to PeckShield, a blockchain security researcher, the hackers stole approximately $8 million in Solana tokens.
According to PeckShieldAlert, the widespread hack on Solana wallets is most likely the result of a supply chain issue that was exploited to steal/uncover user private keys hidden behind affected wallets. So far, the loss is estimated to be $8 million, excluding one illiquid shitcoin (only 30 holds and possibly misvalued $570 million).
Meanwhile, OtterSec, a blockchain security firm, recommends that users move their assets to a hardware ledger or a centralized exchange.
"A malicious actor used an exploit to drain funds from a number of Solana wallets." As of 5 a.m. UTC, approximately 7,767 wallets had been compromised. Several wallets, including Slope and Phantom, have been affected by the exploit. "This appears to have affected both mobile and extension," Solana tweeted. A malicious actor used an exploit to drain funds from several Solana wallets. As of 5 a.m. UTC, approximately 7,767 wallets had been compromised.
Several wallets, including Slope and Phantom, have been affected by the exploit. This appears to have had an impact on both mobile and extension, Solana said in a tweet on August 3.
The wallets that were breached were hot wallets, which meant they were connected to the public internet and could be accessed from mobile phones, laptops, desktop computers, and so on.
What steps did Slope Wallet take in response to this?
Recognizing the community's outpouring of grief over the hack, Slope, a crypto wallet for Solana users, stated that the hackers did not spare the wallets of its "staff and founders."
Slope stated that they are conducting internal investigations and audits, as well as collaborating with top external security and audit groups, developers, and security experts, to resolve the issue and assist users.
Slope has advised its users to create a "new, unique seed phrase wallet, and transfer all assets to this new wallet" until the Solana cyberattack investigation is completed. It is also advised against using the same seed phrase as previous Slope wallet users on the new wallet. "If you use a hardware wallet, your keys are not compromised," Slope explained. Solana stated unequivocally that all hardware-based wallets are secure.
"This exploit was limited to one wallet on Solana, and Slope's hardware wallets remain secure," Solana tweeted. There is no evidence that the Solana protocol or its cryptography was hacked.
How did the hackers carry out the attacks?
"After an investigation by developers, ecosystem teams, and security auditors, it appears affected addresses were at one point created, imported, or used in Slope mobile wallet applications," Solana tweeted.
There is no evidence that the Solana protocol or its cryptography were hacked."
"The widespread hack on Solana wallets is likely due to the supply chain issue exploited to steal/uncover user private keys behind affected wallets," PeckShield said.
Investors have started taking crypto off centralized exchanges amid the market downturn, Ledger Exec Alex Zinder in an interview with Coindesk talked about centralized exchanges focusing on security, we have seen a massive success of crypto in the last 5 years with a tremendous increase in trade and value which has attracted malicious actors into the system. Over the years we have seen a growth in complexity with different and multiple networks creating a vibrant ecosystem and a variety of various new cases like Nfts and this complexity needs to be managed. The global audience of crypto has increased and there is a need for exchanges to have a vibrant operations system to accommodate this audience. The cryptocurrency is a complex ecosystem different from the traditional financial system, exchanges do not close by 5 pm like a traditional bank. This is part of the growing complexity and challenges that have become difficult to manage. There is a need for security at the edges because the challenge of this complexity is that you have intermediaries in more different places just like we have seen with Solana, Solana itself wasn’t hacked, the problem is with the intermediaries, wallet providers. It was a communication between a wallet provider and an NFT market place that compromised these secret keys that are now used to compromise wallets.
Users fear their accounts being hacked because of losing all their assets. Many people are pushing for a hardware wallet, Ledger Enterprises is providing services for a hardware wallet, but does this hardware wallet come without a risk? Security is really the precursor to mass adoption and scalability.
August 2022 Could Be a Bullish Month for Bitcoin; These Could Be Month-End BTC Price Targets
Bitcoin reacted extremely positively as FED rates were announced, with the asset rising significantly above $23,000 each time. The star cryptocurrency, however, was unable to retest the monthly highs above $24,000 as the asset is currently experiencing a significant pullback.
Despite the recent price decline, the BTC price is expected to experience a significant uptrend in the next 30 to 45 days. Will the upswing push Bitcoin's price above $25,000 or remain limited below these levels?
Following the recent price increase, BTC prices are expected to end the month on a bullish note, somewhere above $23,400. Furthermore, a few indicators suggest that a significant upswing may be sustained throughout August, allowing the price to rise above $25,000.
A 100bps increase was avoided.
It was speculated that the FED would raise interest rates by 100 basis points to combat rising inflation. This would have resulted in a massive bearish move in the stock and cryptocurrency markets.
The Dovish Tone was not used.
The term "dovish tone" refers to the aggressive tone used to describe the current situation.
However, the FED did not appear to be dovish in its recent announcement.
The FED will be closed in August.
The next FOMC meeting is scheduled for September 2022, which is 55 days away.
And, with no meetings scheduled in August, a minor rally is possible.
BTC Breaking the Resistance
Bitcoin price in recent times has been attempting to break the crucial resistance at $22,400 comfortably. As the asset is now primed to test the upper resistance, BTC appears to be following a bullish track. Collectively, Bitcoin’s (BTC) price is displaying an extreme bullish picture for the upcoming month as fewer barriers may hinder the rally. In such a scenario, it would be interesting to watch whether the upcoming price action may raise the price beyond $25,000 or remain consolidated below these levels.
Bitcoin nudged above the overhead resistance at $24,668 on Aug 11 but the bulls could not sustain the higher levels. This indicates that bears have not yet given up and are selling on rallies.
BTC/USDT daily chart. Source: TradingView
The price remains squeezed between the 20-day exponential moving average (EMA) ($23,151) and $24,668. Usually, a tight range trading is followed by a range expansion but it is difficult to predict the direction of the breakout with certainty.
In this case, the 20-day EMA is gradually sloping up and the relative strength index (RSI) is in the positive territory, indicating the path of least resistance is to the upside.
If buyers thrust and sustain the price above $25,000, the bullish momentum could pick up and the pair could rally to $28,000 and then to $32,000.
This positive view could invalidate in the near term if the price turns down and breaks below the 20-day EMA. The pair could then decline to the 50-day simple moving average (SMA) ($21,845).
Brief Explanation of the CPI
The Consumer Price Index (CPI) measures the change in prices paid by consumers for goods
and services. The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers. The all-urban consumer group represents about 93% of the total U.S. population. It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and retired people, as well as urban wage earners and clerical workers. Not included in the CPI are the spending patterns of people living in rural nonmetropolitan areas, farming families, people in the Armed Forces, and those in institutions, such as prisons and mental hospitals. Consumer inflation for all urban consumers is measured by two indexes, namely, the Consumer Price Index for All Urban Consumers (CPI-U) and the Chained Consumer Price Index for All Urban Consumers (C-CPI-U). The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is based on the expenditures of households included in the CPI-U definition to meet two requirements: more than one-half of the household's income must come from clerical or wage occupations, and at least one of the household's earners must have been employed for at least 37 weeks during the previous 12 months. The CPI-W population represents about 29% of the total U.S. population and is a subset of the CPI-U population.
The CPIs are based on the prices of food, clothing, shelter, fuels, transportation, doctors'
and dentists' services, drugs, and other goods and services that people buy for day-to-day
living. Prices are collected each month in 75 urban areas across the country from about
6,000 housing units and approximately 22,000 retail establishments (department stores, supermarkets, hospitals, filling stations, and other types of stores and service establishments). All taxes directly associated with the purchase and use of items are included in the index. Prices of fuels and a few other items are obtained every month in all 75 locations. Prices of most other commodities and services are collected every month in the three largest geographic areas and every other month in other areas. Prices of most goods and services are obtained by personal visit, telephone call, or web collection by the Bureau's trained representatives.
6 months CPI Statistics, Source: U.S Bureau of Labour Statistics
Consumer Price Index (CPI) - July 2022
The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in July on a seasonally adjusted basis after rising 1.3% in June, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 8.5% before seasonal adjustment.
The gasoline index fell 7.7% in July and offset increases in the food and shelter indexes,
resulting in the all items index being unchanged over the month. The energy index fell 4.6% over the month as the indexes for gasoline and natural gas declined, but the index for electricity increased. The food index continued to rise, increasing 1.1% over the month as the food at home index rose 1.3%.
The index for all items less food and energy rose 0.3% in July, a smaller increase than in
April, May, or June. The indexes for shelter, medical care, motor vehicle insurance, household
furnishings and operations, new vehicles, and recreation were among those that increased over the month. There were some indexes that declined in July, including those for airline fares, used cars and trucks, communication, and apparel.
The all items index increased 8.5% for the 12 months ending July, a smaller figure than the 9.1-percent increase for the period ending June. The all items less food and energy index rose 5.9% over the last 12 months. The energy index increased 32.9% for the 12 months ending July, a smaller increase than the 41.6-percent increase for the period ending June. The food index increased 10.9% over the last year, the largest 12-month increase since the period ending May 1979.
Understanding the CPI and its impact on the market
The Consumer Price Index (CPI) measures the change in the price of goods and services given to consumers. This monthly data by the Bureau of Labour Statistics helps determine the overall inflation rate.
The outcome of this report is significant as higher reading shows inflation has not been curtailed.
Thus, any further increase from this data will push the FED to hike the interest rate more aggressively during next week's next FED session. The previous reading for this data is 0.3%, while the forecast is 0.7%. A higher reading would mean temporary bearishness for the dollar until the next FED meeting. They will be expected to increase the interest rate for the dollar to stand firm again.
Added to this is the Core CPI, which will be given alongside it also.
The Core CPI measures the change in consumer goods and services prices, excluding food and energy. More attention is given to this later data as it comprises the more significant part of the CPI report and serves as the primary point for determining the rising inflation rate. The forecast for this data is 0.5%, while the previous reading is 0.6%.
July CPI Effect On The Cryptocurrency Market
The cost of living in the United States likely fell in July, but the drop may not be enough to deter the FEDeral Reserve from further rate hikes. Higher interest rates have roiled crypto markets this year, causing the price of Bitcoin to plummet.
According to a FactSet survey of economists, the year-on-year increase in the consumer price index slowed to 8.7% in July from a four-decade high of 9.1% in June. Even with the slight drop, inflation would remain well above the FED's 2% target. Furthermore, core inflation, which excludes volatile food and energy components, is expected to rise to 6.1% from 5.9%.
"The headline CPI is expected to be lower than the previous reading, but given the strength of the economic data released last week, we believe it may be premature for the market to be pricing in the FED pivot," Dick Lo, founder and CEO of quant-driven trading firm TDX Strategies, told CoinDesk.
Many investment banks now believe that the projected CPI decline will not be sufficient to persuade the FED to slow the pace of its rate hikes from the 75 basis point increases made at its last two meetings.
In recent weeks, risk assets, including Bitcoin, have been stabilized due to bearish expectations.
Monthly inflation readings have gained prominence this year because they influence FED policy and demand for the dollar, which is frequently a countervailing factor in Bitcoin prices.
The dollar index, which measures the value of the US currency against a basket of major currencies, has risen 11% this year as the FED embarked on its most aggressive tightening cycle in over two decades. Bitcoin has fallen by 50%.
FED has little leeway
According to Scotiabank, the July CPI could reinforce renewed expectations for higher interest rates following last Friday's stellar jobs report. After leaning toward a 50 basis point increase last month, derivatives markets are now pricing in a 75 basis point increase for September.
According to Derek Holt, Scotiabank's head of capital markets economics, the core CPI will rise to 6.1% from 5.9%. "If that view proves correct," Hold wrote in a client note on Friday, "annualized month-over-month core CPI will be close to 7.5%, in line with the recent three-month moving average." A report like this would "indicate that inflationary pressures remain high."
Markets, according to Holt, have been pricing in rate cuts beginning in early 2023, and he would rather see the FED overtighten to ensure inflation does not "boomerang back upon us."
"Markets to advise otherwise could be akin to believing you know more than your doctor and discontinuing your course of antibiotics in the middle," Holt cautioned.
Last month, FED Chairman Jerome Powell stated that the central bank may slow rate hikes at some point in order to assess the impact of tightening on inflation and the economy.
According to Goldman Sachs, things aren't quite there yet.
"Next week's inflation report appears very unlikely to provide compelling evidence of a slowdown," Goldman's economic research team wrote in the Global FX Trader note on Friday.
They increased their core inflation forecasts for this year due to "stiffer shelter costs."
"With the market still pricing cuts next year," the analysts wrote, "the bottom line is that we continue to see upside risks to inflation and policy pricing over the next few months."
Rapid wage growth and an overheated labor market highlighted by Coindesks Friday's nonfarm payrolls report suggest low odds of a significant decline in inflation anytime soon.
In a weekly note, Avery Shenfeld, chief economist at CIBC World Markets, expressed a similar view, forecasting an above-consensus core CPI that would be "too hot for the central bank's tastes."
What crypto assets are investors buying in August as the bullish rally continues?
According to cryptocurrency analysis firm Santiment, the actions of a specific group of investors in the crypto market have revealed where they are putting their funds amid the ongoing bullish rally.
According to Santiment, stablecoins such as Tether (USDT) and USD Coin (USDC) are being amassed by "sharks," or entities that own between 10,000 and 100,000 units of a particular cryptocurrency.
This, according to the market intelligence firm, demonstrates investors' skepticism about the viability of the most recent crypto market boom. Nonetheless, the release of the July Consumer Price Index (CPI) in the United States was welcome news for cryptocurrency investors. The global crypto market is currently valued at $1.16 trillion, a 7.38% increase over the previous day, with trading volume increased by more than 32%.
The price of Bitcoin increased minutes after the United States Commerce Department released its July inflation report, which showed prices decreasing at a slightly slower rate than most analysts expected.
Ether broke the $1.9 barrier for the second time in three days, rising more than 12% from the previous day. Even in the absence of CPI data, the second-largest cryptocurrency by market cap has been gaining ground.
The long-awaited Ethereum blockchain Merge, which will transition the protocol from a proof-of-work paradigm to a proof-of-stake paradigm that uses less energy, is almost here.
The majority of the other popular cryptocurrencies were also soaking up the rays, with XRP, Cardano, and Solana all seeing significant gains.
Several analysts, however, remain skeptical about the long-term implications of recent price increases. Analysts are not convinced that the market will turn around as long as the FED continues to raise interest rates and inflation remains high. Several analysts believe the bear market is nearing its end because FED Chairman Jerome Powell has begun to claim that rate hikes have had a discernible impact.
The July CPI announcement is showing a positive impact on the cryptocurrency market due to the reduction in inflation compared to other months.
Disclaimer: This article is for educational purposes only and is not intended as investment advice. Qualified professionals should be consulted prior to making financial decisions.
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