CoinLoan Weekly: CPI pressure, puzzling rally, BTC-stock decoupling

Price dynamics

BTC price

Having slid from $19,500, BTC wavered under $19,200 until the CPI report triggered a 7-day low of $18,372.47 on Thursday, October 13. This trough was quickly followed by a peak — a 7-day high of $19,872.75 on Friday, October 14. By the end of the day, BTC had resumed hovering around $19,100, where it stayed until perking up on Monday, October 17.

The Fear and Greed Index remained on the extreme fear level, see-sawing between 20 and 24. In the aftermath of the Labor Department data, BTC lost nearly 4%. The pressure dragged it to the lowest low since June, below the plunge brought on by the August inflation figures. On Monday, October 17, the coin gained 1.4% on moderate volume, reaching $19,670 at one point.

As of this writing, BTC is trading at $19,533.46, with a 24-hour gain of +1.1% and a 7-day uptick of +0.5%.

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ETH price

Trailing the pioneering coin, ETH fell to $1,275 and bounced back to $1,300 on Wednesday, October 12. The following day, CPI data pushed it to a low of $1,216.50. Friday, October 14, brought a 7-day high of $1,336.21. This rebound proved short-lived — by Sunday, October 16, ETH had descended to around $1,280. It rose again on Monday, October 17, approaching Friday's high.

On Monday, October 17, ETH mirrored BTC, gaining 1.3% to teeter above $1,300. Still, the coin is merely about 0.01% up since the first signs of Merge-related deflation on October 8. Moreover, it is over 9% down since mid-September, partly due to the dumping of 3.3 million coins by shark and whale addresses in the past five weeks.

As of now, ETH is trading at $1,323.66, with a 24-hour climb of +1.5% and a 7-day shift of +0.1%.

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XRP price

XRP's rally petered out as it fell to $0.48 on Tuesday, October 11, and bottomed out at $0.451981 on Thursday, October 13. Compared to BTC and ETH, Friday's upswing was relatively faint, with XRP barely touching $0.51. The price lingered just above $0.48 through the weekend. Trading on Monday, October 17, bolstered it only slightly.

XRP is in hover mode as Ripple awaits the outcome of its legal battle against the SEC. In stark contrast to the previous week, it lost over 11% in total, while BTC and ETH regained lost ground. Yet XRP was the only top 10 crypto positive over the 7-day period ending on Friday, October 14, and analysts see multiple signs of a bullish continuation.

As of now, XRP is trading at $0.473070, with a 24-hour drop of -1.6% and a 7-day decline of -11.4%.

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Cryptocurrency news

Crypto soars despite bad inflation news

On Thursday, October 13, crypto seemed to move irrationally, along with equities and bonds. Despite the dismal CPI report, these asset classes closed flat to up, leaving traders puzzled. Journalists struggled to come up with rationales, noting that the rally had come "out of nowhere."

September figures from the US showed a 0.4% rise in the consumer price index (CPI), above the projected 0.2%, a significant rise compared to August, when month-over-month inflation was 0.1%. This change shattered hopes of milder rate hikes by the Fed. Furthermore, the rest of the background looked quite gloomy, with the UK government under fire and little hope for an easing of geopolitical tensions.

Such news typically suppresses crypto and stocks while propping up bond yields. This usual scenario was cut short in about an hour as crypto and equities shot up around 9:30 a.m. ET. While BTC gained 7.8% to end the day at just over $19,800, the Dow Jones Industrial Average (DJIA) bottomed out to rise by 4.6%. Bonds, despite a recovery, failed to recoup their early losses.

Stock experts cited earnings reports, investors thinking that inflation had peaked, and the technical backdrop. The latter concerned the S&P 500 reaching a crucial level that triggered profit-taking in put options and actual buying. Barron's Deputy Editor Ben Levisohn concluded that "sometimes markets move more because of positioning and trading, not for any fundamental reason."

Speaking to CNBC, Jeff Dorman, chief investment officer at Arca, described Thursday's dynamics as "a knee-jerk reaction lower in all markets which was algo-driven, then short-covering and real buying stepped in, which was the right response to the CPI data." For the markets, inflation is less of a concern — instead, "they are concerned with the Fed's expected response to inflation, and nothing changed yesterday: 75 basis points was baked in, it was confirmed further by the CPI data."

CoinDesk cited Tker.co editor Sam Ro, who suggested "forward reflexivity" logic. For investors expecting a challenging rate hike and recession, pushing prices up could be just as rational as subduing them. In the former case, buyers could be motivated by lower rates expected next year, as the argument goes.

Risky assets have reacted counterintuitively before. For instance, stocks have sunk following robust jobs data. While rising employment is positive for the economy, it foreshadows higher interest rates that drag down asset prices. Thus, while Ro's hypothesis is "unfalsifiable," it hints at decision-making complexity going beyond salient fundamentals and "reductive just-so stories" of financial analysts.

Bitcoin's correlation with stocks weakens

As the year draws to a close, Bitcoin's connection to stocks is apparently waning. Lately, the pioneering cryptocurrency has been less volatile compared to equities. This change comes after months of fighting the macro pressures affecting stocks and bonds.

Around the world, central banks have implemented monetary tightening to tame inflation. These efforts have stirred intense downward volatility eating away at investors' appetite for conventional and digital assets.

While Q4 has brought hope for some recovery, Bitcoin and other cryptos are comparatively lethargic. Despite this week's push above $20,000 mirroring a stock rally, the coin is below the critical level again. BTC's 30-day realized volatility has slid to roughly 52% from above 64% last month on an annualized basis.

Furthermore, the BitVol gauge is just over 59, approaching its lowest lows since the spring. On May 12, it was close to 110. Richard Usher, head of OTC trading at the BCB Group, suggests that "until broad risk bounces, this sector won't."

Yuya Hasegawa, Bitban's crypto market analyst, notes, "The price of bitcoin is maintaining the $19,000 level, but with the FOMC's minutes and CPI ahead this week, the market will likely refrain from taking risks, which in turn will likely put pressure on bitcoin."

Thus, while stocks have been rising, BTC lacks correlation. Bloomberg warns against interpreting this disconnect as a positive sign due to low volumes. The daily indicator is now at half of what it showed in early 2022 — around $50 billion as opposed to $100+ billion in March, according to CoinMarketCap.

Together, low volatility and low volume are more toxic for BTC than stocks, as the crypto market is highly speculative. Many of its participants merely aim to cash in on dramatic swings.

According to Yassine Elmandjra, ARK Investment Management analyst, low volatility could indicate that "Bitcoin is becoming more boring and less contrarian," but combined with low volume, it "might not be great for bitcoin." Compass analyst Chase White expressed similar concerns, writing in a note that "the subdued volatility relative to other assets on continued declining volumes has the potential to lead to downside."

In 2018, the BTC price halved, tumbling to $3,000, although few had taken the pessimistic sentiment seriously. A sell-off in the current low-volume bearish environment could trigger an accelerated price drop. Steven McClurg, co-founder and CIO at Valkyrie Investments, explained, "we're already in a recessionary period; we believe it could get worse, and the Fed will continue to raise rates, and people might start taking money off the table."