Bitcoin and Cryptocurrencies have suffered inflation

Today, there is a complicated situation in the crypto market again. A situation that may be more than necessary to shed light on, not least in order to move more intelligently in the markets in the coming months. Months that will continue to be characterized by the spasmodic attention of the markets to inflation and everything related to it.

Bitcoin: More than $100 million Liquidated in one hour

In just one hour of Friday morning, Bitcoin lost more than $1,000. That’s almost $2 billion in market capitalization after a major wave of liquidation. As usual, this fall caused panic, which spread to the altcoin market. Altcoins suffered from the daily session even more than the king of cryptocurrencies.

Thus, it was the wave of liquidations that created the market conditions of that day. To better understand this, let’s look at the Bitcoin price chart for the last 7 days:

So, as of today, according to Coinmarketrate.com , Bitcoin fell by 13%. At the time of writing, it is trading at $21,500, increasing morning recoveries.

For some, this sale was predictable. Indeed, Bitcoin was already under some pressure, reaching a weekly low around $23,200. On this day, Bitcoin reached a level of liquidation that has not been observed since June 18. Within an hour, the amount of liquidations exceeded $200 million for the entire cryptocurrency market.

On Friday, at the end of the day, we also learned that Vladimir Van Der Laan, the main developer of the Bitcoin network, is leaving his post. This information was supposed to affect the price of the BTC, and inevitably the cryptocurrency market as a whole. Combined with the Fed’s statement that it was pushing for a rate hike again, the cocktail for further falls was well-founded.

Altcoins follow the example of BTC

Such a sharp decline in the Bitcoin exchange rate had a direct impact on altcoins. Among the 10 largest altcoins, all of them show a decline. Most of them even show losses exceeding Bitcoin’s losses

Ethereum had a hard time. It has lost about 18% of its value.

All major altcoins show losses greater than Bitcoin. For 7 of these 10 projects, the losses exceed 20%. In the top 100, losses of over 15% account for the majority of projects. Over the past 24 hours, the cryptocurrency market has lost more than 7% of its value with a market capitalization of 1,020 billion.

Chart of the market capitalization of cryptocurrencies

A correction of the rise or a new “bull trap”?

This is the question of today. Does this new market movement reflect a correction before returning to growth, in accordance with what has been happening for several weeks, or are we, on the contrary, moving towards a return to sharp falls? In this respect, both hypotheses seem plausible today.

In any case, the fear and greed index, which measures market sentiment, is still at 27/100, after several days at over 40.

Fear index. Source: Alternative.me

What is happening today may well cause him to deviate from the course again, to “extreme fear”. After all, the main source of troubles are macro conditions in the world.

Inflation and factors affecting the situation

Bitcoin is an asset against inflation? So far, she has not behaved like this, and this is an actual fact that even the most inventive analysts will have to reckon with. It, like the rest of cryptocurrencies, behaves or, rather, is still regarded as a high-risk asset, similar to how it is done with growth stocks, that is, with those with the highest potential growth rate and the highest potential risk level. Based on this assumption (and only from it), we can make some reasonable observations about the relationship between inflation and Bitcoin today.

• The goal of central banks is to maximize employment and maintain inflation at 2%.

This is the first fact that you need to remember first, and then try to understand. Basically, we are talking about the Fed, which has a dual mandate – to achieve maximum employment during the economic cycle and inflation at 2%.

Dual mandates often contradict each other, especially with very high inflation, as in recent years, since measures (as we will see) to contain inflation often have a negative impact on the level of employment, as they reduce the level of economic activity. At least on paper, the ECB, as it may be, will be more focused on maintaining price stability – and again on the magic number of 2% inflation as an ideal.

• Inflation

And we must consider it as such if we want to understand its movements.

Central banks have (almost) enormous power over the price level

This is due to the fact that they have the monetary policy of the entire economy in their hands, which they can change by touching the base interest rate, which they have been doing for several months, especially in the United States. Higher rates mean lower economic activity and lower prices, or more precisely, lower inflation.

Keeping these two factors together, we can easily understand why the markets, not only cryptocurrency, but all risk markets, are really reacting badly to tightening in this regard. Higher rates mean lower risk appetite in the markets. And when this appetite decreases, positions are closed and prices fall.

There is nothing new about inflation, so why are the markets reacting so violently?

Simply because markets move on expectations, not just on actual data. Rather, first they move, correcting expectations as a fait accompli, and then, when the fait accompli comes, they rebuild, depending on the distance from expectations, their attitude.

Although historically the Federal Reserve does not announce any official moves in August, sending what was set in July has contributed to the deterioration of market expectations in the short term. This has also affected Bitcoin and cryptocurrencies, as can be seen from the charts.

What to expect from fundamentals, and why do short-term movements leave time for them?

One of the biggest mistakes that can be made is to mix short—term considerations with long-term ones. In the short term, we are likely to continue to have both bullish and bearish movements of a certain intensity, which may also ignore the supports and resistances that seem obvious to us.

In the medium and long term, we still believe that the markets have largely discounted the upcoming events, and that the situation can only improve further, provided that there are no more unpredictable exogenous shocks, that is, those that technically come from outside the markets.

The situation continues to be difficult, as we have been reporting all this time, and the past weekend, with its unpredictability, makes it even more difficult to track a possible recovery or further decline.

Those who adhere to the long-term perspective may, in all likelihood, ignore it. On the other hand, those who are engaged in trading, provided that they have the necessary tools for this, can also take advantage of this situation.