The latest bitcoin and crypto sell-off was sparked by fears the Federal Reserve could put its “foot on the gas” in its fight to drive down inflation after the latest US consumer price index reading showed the economy remains red-hot.
Inflation fears spark bitcoin and crypto price crash
Bitcoin, ethereum and other major cryptocurrencies crashed this weekend, with more than $100 billion wiped from the combined crypto market after US Treasury secretary Janet Yellen issued a stark crypto warning.
The bitcoin price dropped to around $27,000, its lowest price since late 2020 while ethereum crashed to under $1,500. Smaller cryptocurrencies are performing even worse, with BNB, solana, cardano, XRP, dogecoin, tron and avalanche all seeing double-digit percentage declines over the last 24 hours.
“The Federal Reserve is backed into a corner now,” crypto investor and influencer Anthony Pompliano wrote in his newsletter after the latest inflation data was released.
On Friday, data showed prices in the US rose faster than expected in May, rising to 8.6% after easing in April, fuelled by rising energy and food costs and pushing inflation to its highest rate since 1981.
“Inflation hasn’t subsided even though the Fed has been increasing interest rates and conducting quantitative tightening. They don’t have many more options other than to simply put their foot on the gas,” says Pompliano.
“The Fed could try to accelerate the interest rate increases, both in speed and severity, along with accelerate quantitative tightening. I’m not sure that they will do it, but there aren’t many other avenues to pursue.”
Next week, the Fed is expected to raise its interest rate to 1.25%-1.50%, after a similar move last month. A Reuters survey found economists are forecasting a further 50 basis point rate hike in July.
“[Friday’s] inflation report is the last big release before the Fed meeting next Wednesday,” Alex Kuptsikevich, FxPro senior market analyst, wrote in an emailed note.
“A renewal of inflation to 40-year highs will surely attract the public’s attention at the weekend and will pressure the Fed. Potentially, such high reading could trigger a tougher [Fed] stance in the accompanying commentary.”
The bitcoin, ethereum and crypto market has been falling steadily over the last six months, crashing along with the stock market as the Federal Reserve and other central banks around the world hike interest rates and begin to taper pandemic-era stimulus measures.
The Fed this month started to the long process of shrinking its swollen $9 trillion balance sheet, known as quantitative tightening.
“Bitcoin’s ongoing correlation with macro-forces-roiled stock markets has snuffed optimism and sparked frustration at a time when crypto seems to be missing the perfect opportunity to demonstrate its forgotten role as a hedge against inflation,” comments Rich Blake, financial consultant at crypto platform Uphold.
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