The virtual currency market shook sharply in the past week after the US announced a higher-than-expected inflation report and investors were concerned about the possibility of the Fed continuing to raise interest rates sharply.
As of the morning of October 15, Bitcoin was trading at $19,170, down 2.05% from the end of last week. Meanwhile, Ethereum – the second largest virtual currency – is also down 2.69% over the past week, hovering around $1,300. The prices of the world’s two largest virtual currencies fluctuated sharply after the US released the inflation report.
Other cryptocurrencies in the top 10 have largely fallen over the past week, with Cardano plunging 13%, Solona down 8.5%, and Ripple down 6%.
The evolution of the top 10 virtual currencies
Steve McClurg, chief investment officer at Valkyrie Investment, said the market’s initial reaction was expected to high inflation, hinting to investors that the Fed will continue to raise rates as planned.
“We firmly believe that the market hasn’t bottomed yet and there is likely to be another 10 to 15 percent drop in digital assets and even more in equities,” he said.
Analysts say that the price of Bitcoin is likely to continue to fall. Although recent Bitcoin price movements have reduced dependence on the stock market. But the correlation between these two asset classes is still very high.
US inflation increased more than expected in September
Prices of goods and services in the US rose more than expected in September and put additional pressure on the US economy.
The consumer price index (CPI) in September 2022 increased by 0.4% compared to the previous month, higher than the forecast of 0.3% increase of experts polled by Dow Jones. Over the 12-month period, overall inflation increased by 8.2% in September, well below the peak of 9% in June, but still hovering near a 40-year high.
Excluding food and energy prices, core CPI rose 0.6% month-on-month, beating the Dow Jones estimate for a 0.4% increase. Over the same period, core inflation increased by 6.6%, the highest level in 40 years.
Inflation remained strong despite the Fed’s aggressive interest rate hikes. To date, the Fed has raised a total of 3 percentage points since March 2022.
September inflation data further reinforces the possibility of a 75 basis point hike in November 2022. Currently, the trader thinks that there is a 98% probability that the Fed will raise 75 points.
In fact, the possibility of a 75 basis point hike in December 2022 is also increasing to 62% after the inflation report.
“The Fed will not only raise rates by 75 basis points next month, but it is also likely to raise rates by another 75 basis points in December 2022,” Zaccarelli wrote in an October 13 report. “This means the Fed started the year at 0-0.25% and will close 2022 at 4.25-4.5%.”
Even before the inflation data was released, Fed officials were surprised by the increase in inflation in previous months, according to the September meeting minutes.
In the discussion before deciding to raise 75 basis points, Fed members noted that inflation is having a heavy impact on low-income people. They emphasized that high interest rates will have to be maintained until inflation shows signs of abating.
“Members believed that the Committee needed to act and then maintain a policy stance towards economic restraint to achieve the goals of full employment and price stability,” quoted from the minutes of the meeting.
The officials further noted that inflation so far “has not shown any signs of cooling down… They think interest rates must continue to raise to achieve the target”.
El Salvador loses 60 million USD because of Bitcoin investment
El Salvador currently incurs a large loss in Bitcoin holdings, as the price of this digital currency has lost 60% since the beginning of the year.
Last year, El Salvador announced the legalization of Bitcoin, in the hope of reforming its economy, turning the poor Central American country into a pioneer in a financial revolution. El Salvador’s President Nayib Bukele at the time also stated that the country had invested in Bitcoin and kept buying it every time the price dropped.
However, CNBC quoted many sources, including Bitcoin firm Coinkite (which tracks President Bukele’s statements about buying Bitcoin) as saying that El Salvador is currently losing about $ 60 million because of this digital currency. However, this is only a loss on paper and will not materialize until they sell these Bitcoins. The country currently holds more than 2,300 Bitcoins. All were purchased within the past year.
Read more: Bank of America Survey of Wealthy Americans: Young People Are 7.5x More Likely to Hold Crypto in Their Portfolio