The Crypto Markets Continue to Drop, Why?

Key Insights:

  • Despite positive CPI and PPI data, Bitcoin and altcoins continue to decline as the US Dollar strengthens and market uncertainties persist.
  • Federal Reserve’s hawkish stance and ECB’s rate cut contribute to crypto market struggles, overshadowing favorable economic data.
  • Ongoing uncertainty about the Ethereum ETF listing keeps crypto markets cautious, hindering any potential positive momentum.

The cryptocurrency markets have experienced a significant downturn recently, driven by unfavorable macroeconomic data and other influential factors. Renowned crypto analyst Michael van de Poppe recently outlined several key reasons for the persistent decline in cryptocurrency values. 

Impact of Macroeconomic Data

The past week saw several macroeconomic data releases pointing to weaker economic conditions. Despite these negative indicators, the US Dollar and gold continued to strengthen. The Consumer Price Index (CPI) data, released last Wednesday, played a pivotal role. The CPI measures the average change in prices over time that consumers pay for a basket of goods and services, and it significantly influences the Federal Reserve’s decisions on interest rates.

The latest CPI data showed a year-over-year increase of 3.3%, slightly below the expected 3.4%. Similarly, the Core CPI, which excludes volatile food and energy prices, came in at 3.4%, under the forecast of 3.5%. Monthly figures were also positive, with a 0.0% change compared to the expected 0.1% and 0.2% versus the anticipated 0.3%. These figures generally favor risk-on assets, suggesting potential future rate cuts. However, this positive sentiment did not translate into an upward momentum for the crypto markets.

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Producer Price Index and Consumer Sentiment

The Producer Price Index (PPI) data, which reflects the average change over time in the selling prices received by domestic producers for their output, was released on Thursday. The PPI data also showed better-than-expected results, with regular PPI at 2.2% compared to the expected 2.5% and Core PPI at 2.3% versus the anticipated 2.4%. Monthly data was similarly favorable, with a -0.2% change against the expected 0.1% and a 0.0% change versus the anticipated 0.3%. Despite these promising numbers for risk-on assets, crypto markets continued their downward trend.

Consumer sentiment data was released on Friday, offering a mixed signal for the markets. The sentiment index reached 65.6, significantly lower than the expected 72.1. Lower consumer sentiment typically indicates weaker economic strength and an eagerness for rate cuts. However, this did not provide the expected boost to crypto assets, which continued to struggle.

Hawkish Federal Reserve and Bond Yields

Federal Reserve Chairman Jerome Powell’s speech on Wednesday evening was notably hawkish. Despite the CPI and PPI data suggesting the need for rate cuts, Powell maintained a firm stance, indicating a downward revision in the number of potential rate cuts for 2024. This approach, coupled with the worsening economic data, hints at a potential upcoming recession. The increasing debt burden on the US government also exacerbates the situation, underscoring the necessity of rate cuts soon.

Treasury bond yields have been declining, which is favorable for Bitcoin and other risk-on assets. The 2-year Treasury yield dropped to its lowest point in two months at 4.694%, while the 10-year yield fell to 4.211%, the lowest since early April. Despite these movements, Bitcoin has yet to rally as expected. The persistent strength of the US Dollar, driven by the European Central Bank’s recent rate cut, has played a critical role in this divergence.

Cryptocurrency Market Dynamics

Bitcoin’s price action has been notably poor, impacting altcoins significantly. The continued strength of the Dollar, which reached 105.75 points, has overshadowed positive inflation data that would typically support crypto market growth. The rate cut by the European Central Bank has contributed to the Dollar’s strength, positioning it as a more attractive currency than the Euro.

In contrast to Bitcoin, gold has maintained its upward momentum, reflecting a divergence in market behavior. This suggests a continued lack of confidence in crypto assets despite favorable conditions for other risk-on assets. Another contributing factor to the crypto market’s struggles is the uncertainty surrounding the potential listing of the Ethereum ETF. 

The combined influence of these factors points to a potential short-term continuation of the downward trend in the crypto markets. The anticipation of rate cuts, despite mixed economic signals and Powell’s hawkish stance, creates an environment of uncertainty. Investors will likely remain cautious, awaiting more definitive signals regarding economic policies and the potential Ethereum ETF listing.

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