The most likely culprit on the day is a hotter-than-expected consumer price index (CPI) report that showed consumer prices rising by 0.4% in September. Compared to a year ago, consumer prices are now 8.2% higher, according to data from the Bureau of Labor Statistics.
The CPI report showed similar upticks in other categories, with the core CPI rising by 0.6% month-to-month since September and by 6.6% over the past 12 months, when food and energy prices are removed.
Meanwhile, nonfarm payrolls added 263,000 in September, and the unemployment rate dropped to 3.5%.
In brief, rising inflation is the absolute last thing the Federal Reserve wants to see. The Fed’s rate hikes are meant to cool off the economy and put a damper on high inflation, so the Oct. 13 higher-than-expected report is likely to translate into another round of 0.75-basis-point hikes in the upcoming months.
In response to the report, Bitcoin price shed nearly 5% and Ether (ETH) dropped by 6% before both regained a majority of their losses in intraday trading. The fact that BTC and Ether are trading above their daily lows suggests that traders had anticipated an unfavorable CPI report and that the negative newsflow was already priced in.
Similar to BTC, the Dow and S&P 500 also nursed losses following the CPI report, but both indexes are set to close the day in the black with a 3% and 2.72% gain, respectively.
While the short-term reaction to the inflation report might inspire confidence from day traders, the general economic outlook remains bleak, and the high correlation between crypto and equities markets could translate for further downside for Bitcoin price if talk of higher interest rate hikes begins to dominate news headlines.
There are also a number of economic events occurring in mid-October that could continue to pressure crypto prices. The following dates highlight important economic events that have a history of impacting investor sentiment in the crypto market:
- Oct. 17: Q3 earnings season begins
- Oct. 28: Personal Consumption Expenditures (PCE) price index
In addition to these upcoming events, the strength of the United States dollar and what appears to be a serious escalation in the conflict between Ukraine and Russia continue to weigh on all markets.
Let’s take a deeper look into three reasons why crypto prices keep falling in 2022.
Federal Reserve interest rate hikes
Raising interest rates increases the cost of borrowing money for consumers and businesses. This has the knock-on effect of raising business operational costs, the costs of goods and services, production costs, wages, and eventually, the cost of nearly everything.
High, unsupressable inflation is the primary reason the United States Federal Reserve is raising interest rates. And since rate hikes began in March 2022, Bitcoin and the broader crypto market have been in a correction.
When monetary policy or metrics that measure the strength of the economy shift, risk assets tend to signal, or move, earlier than equities. In 2021, the Fed started signaling its plans to raise interest rates eventually, and data shows Bitcoin price sharply correcting by December 2021. In a way, Bitcoin and Ethereum were the canaries in the coal mine that signaled what lay ahead for equities markets.
If inflation begins to taper, the health of the economy improves, or the Fed begins to signal a pivot in its current monetary policy, risk assets like Bitcoin and altcoins could again be the “canaries in the coal mine” by reflecting the return of risk-on sentiment from investors.
The persistent threat of regulation
The cryptocurrency industry and regulators have a long history of not getting along either due to various misconceptions or mistrust over the actual use case of digital assets. Without a working framework for crypto sector regulation, different countries and states have a plethora of conflicting policies on how cryptocurrencies are classified as assets and precisely what constitutes a legal payment system.
The lack of clarity on this matter weighs on growth and innovation within the sector, and many analysts believe that the mainstreaming of cryptocurrencies cannot happen until a more universally agreed upon and understood set of laws is enacted.
Risk assets are heavily impacted by investor sentiment, and this trend extends to Bitcoin and altcoins. To date, the threat of unfriendly cryptocurrency regulations or, in the worst case, an outright ban continues to impact crypto prices on a nearly monthly basis.
Scams and Ponzis triggered liquidations and repeat blows to investor confidence
Scams, Ponzi schemes and sharp market volatility have also played a significant role in crypto prices crashing throughout 2022. Bad news and events that compromise market liquidity tend to cause catastrophic outcomes due to the lack of regulation, the youth of the cryptocurrency industry and the market being relatively small compared with equities markets.
The implosion of Terra’s LUNA and Celsius Network as well as misuse of leverage and client funds by Three Arrows Capital (3AC) were each responsible for successive blows to asset prices within the crypto market. Bitcoin is currently the largest asset by market capitalization in the sector, and historically, altcoin prices tend to follow whichever direction BTC price goes.
As the Terra and LUNA ecosystem collapsed on itself, Bitcoin price corrected sharply due to multiple liquidations occurring within Terra — and investor sentiment tanked.
The same happened with even greater magnitude when Voyager, 3AC and Celsius collapsed, erasing tens of billions in investor and protocol funds.
What to expect for the rest of 2022 through 2023
The factors impacting falling prices within the crypto market are driven by Federal Reserve policy, meaning the Fed’s power to raise, pause or lower rates will continue to have a direct impact on Bitcoin price, ETH price and altcoin prices.
In the meantime, investors’ appetite for risk is likely to remain muted, and potential crypto traders might consider waiting for signs that U.S. inflation has peaked and for the Federal Reserve to begin using language that is indicative of a policy pivot.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.