CPI report could indicate rise in US inflation — What will be the impact on Bitcoin’s value?

The S&P 500 index is presently trading just 6% below its record high, which was achieved in January 202. Typically, such a scenario would be interpreted as a bullish indicator for risk-on assets, including commodities and cryptocurrencies. However, this time, it seems that investors have been utilizing the stock market as a safeguard against the recent surge in inflation, which has remained above 4% from April 2021 to May 2023.

For Bitcoin (BTC) and cryptocurrency investors, inflation has generally been perceived as a favorable element affecting prices, as demonstrated by the previous all-time highs of $65,000 and $69,000 that occurred during a phase of monetary expansion and rising inflation in 2021. Nonetheless, the current context is distinct, as inflation is resurging while the Federal Reserve has been effectively tightening liquidity in the market. Consequently, the influence of inflation on cryptocurrencies is uncertain.

Is the tech stock bubble bursting?

The recent seven-day downturn among tech giants — including Fortinet (FTNT) with a 25.7% decline, Block Inc. (SQ) down 20.5%, PayPal (PYPL) falling by 15%, Shopify (SHOP) down 14.8%, and Palo Alto Networks (PANW) down 13.9% — has attracted the attention of investors, especially in light of the anticipated additional interest rate hike by the Federal Open Market Committee on Sept. 20.

Economists forecast that the Consumer Price Index for July, set to be released on Aug. 10, will be approximately 3.3%, exceeding the previous month’s figure of 3% and surpassing the central bank’s 2% target. With the latest unemployment rate at 3.5% in June, approaching a 40-year low, the Fed’s move toward tightening the economy appears increasingly likely.

Gold, a conventional safe haven, has struggled to break the $2,000 threshold on several occasions since 2020, reflecting a lack of confidence in its capacity to hedge against risks.

Gold price in USD (blue, right) vs. S&P 500 index (orange, left). Source: TradingView

The real estate sector has also been affected, facing constrained housing supply and increasing mortgage rates, as indicated by Redfin’s second-quarter revenue decline of 21% compared to the previous year. The company anticipates a further drop of 15% to 20% in transaction value for Q3.

Even traditional safe assets such as bonds are losing some of their attractiveness due to the ongoing rise in U.S. federal debt. Investment mogul and hedge fund billionaire Bill Ackman reportedly shorted 30-year U.S. Treasury bonds, voicing concerns regarding long-term inflation.

A report from the U.S. Treasury Department on July 31 disclosed a $1 trillion quarterly net borrowing estimate and an unexpected Fitch Ratings downgrade of U.S. debt, further intensifying concerns in the financial markets.

As a result, investors are now exploring alternative markets, and Bitcoin whales have increased their leveraged long positions using derivatives, even as the cryptocurrency’s price hovers around $29,500.

Bitcoin’s price support at $29,000 is backed by solid derivatives metrics

Bitcoin quarterly futures generally trade at a slight premium compared to spot markets, as sellers require more funds to postpone settlement. Healthy markets typically exhibit BTC futures contracts trading at a 5% to 10% annualized premium, a condition known as contango, which is not exclusive to crypto markets.

Bitcoin 3-month futures premium. Source: Laevitas

The BTC futures premium (or basis rate) on platforms like Deribit and OKX reached 8%, the highest level in over three weeks. This elevated premium indicates that professional traders are willing to incur additional costs to engage in leveraged longs, reflecting a positive outlook toward Bitcoin.

Market sentiment can also be assessed by analyzing whether there is more activity in call (buy) options or put (sell) options. A 0.70 put-to-call ratio suggests that put option open interest lags behind the more optimistic calls, indicating a bullish sentiment. Conversely, a 1.40 ratio favors put options, which can be interpreted as bearish.

BTC options volume put-to-call ratio. Source: Laevitas

The put-to-call ratio has remained below 1.0 since July 24, indicating strong demand for call (buy) instruments. This data implies investors’ optimism regarding the potential price increase of Bitcoin.

There are growing indications that Bitcoin could potentially gain from the inflation rise. However, if investors begin to doubt the Federal Reserve’s notion of a soft landing for the economy and believe that a severe recession is imminent, they are likely to initially prefer Treasurys and cash positions.

In the short to medium term, there is little evidence to suggest that Bitcoin will see a significant increase if inflation becomes widespread in the United States. Nevertheless, there is optimism for bullish investors, as the cryptocurrency has demonstrated solid support at the $29,000 level.

This article is for informational purposes only and is not intended to be construed as legal or investment advice. The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.