Investors are staying off crypto assets due to soaring inflation, which surged to a 40-year high last month. This could be bad for the digital currencies market that had just started to take off.
Edward Moya, a senior market analyst for Oanda, says a very hot inflation report could be trouble for cryptos as the debate for even more aggressive Fed tightening will begin. He highlighted that Wall Street thought a 75 basis point increase would be the worst-case scenario for the July policy meeting, but now it could be made for a full point increase. Moya pointed out that the risks of the Fed sending the economy into a recession are growing. This is bad news, especially for risky assets like Bitcoin.
The popular cryptocurrency was regarded as a hedge against inflation. Leigh Drogen, head of Starkiller Capital, says Bitcoin is high-growth technology – not an inflation hedge. He explained that crypto is like high-risk tech stocks. When it takes a hit, BTC goes down. Moreover, an army of novice investors plowed cash into crypto in 2021. Drogen says now the casino isn’t as interesting as it was then. But Campbell Harvey, from Duke University, believes the crash is unlikely to deter venture capital investment in the broader crypto economy. He gave 2018 as an example – saying that there was no negative effect whatsoever.
Moya says Bitcoin needs a risk appetite to stabilize. But that won’t happen if financial markets continue to price in more tightening by the Federal Reserve. Frank Corva, a senior analyst at Finder, highlighted that the more expensive consumer goods become, the less disposable income people have to invest in risk-on assets like crypto. He likens digital assets to sponges for excess liquidity. As such, the Fed is engaging in quantitative tightening to extract liquidity from the system. In other words, the Fed is withdrawing money from financial markets. Corva said consumer goods are becoming more expensive and this is not good for crypto.