In the wake of Tuesday’s US Consumer Price Index (CPI) data, which confirmed an expected jump in MoM price pressures and revealed a smaller-than-expected decline in the YoY rate of inflation, Deribit’s Bitcoin Volatility Index (BTC DVol) surprised some analysts by remaining broadly unchanged. The lack of movement in the BTC DVol, which was last at 48 on Wednesday versus 50 on Monday and remains not far above record lows, matches the post-CPI mood seen in the Bitcoin market.
Inflation Data Caused a Good Spkie in Bitcoin
Bitcoin recently traded at a rate of around $22,800 and has since surged 4.5% after the US CPI data was released on Tuesday. Even with stronger-than-expected Retail Sales figures in the US from Wednesday pushing 2-year yields up 10 bps, Bitcoin has still managed to increase by 4.7% this week alone! Meanwhile, The USDX (DXY) rose 0.5%.
US bond and currency markets suggest that the Federal Reserve is likely to raise rates by at least 75 bps to hit their 5.25-5.50% target range, with CME’s Fed Watch Tool indicating a probability above 50%. This prediction marks an immense increase from last month’s 6%, as proven by pricing data from 30-Day Fed Funds futures contracts.
BTC Is More Resilient than Expected
Analysts are astounded by Bitcoin’s resilience in the face of recently observed trends across bond and currency markets. When short-term US interest rates grow, so does the “opportunity cost” for holding a non-yielding asset such as Bitcoin. On top of that, higher yields on risk-free assets like US bonds decrease investors’ incentive to take risks with more speculative options such as cryptocurrency. Despite all this, however, Bitcoin has displayed remarkable resilience!
Conversely, when short-term yields are being driven by expectations of a more stringent Federal Reserve policy, it can be seen as an indication of potential weaker economic growth in the US. This is because rising interest rates tend to harm economic activity. And therefore, this could lead to decreased demand for risk-sensitive assets such as stocks and cryptocurrency.
Despite the recent short-term volatility, Bitcoin continues to outperform in 2021 with a gain of 38%. Even more promisingly, options markets point towards tranquil waters ahead. Data collected from past trends indicate that BTC DVol has only reached current or lower levels on 11 different occasions – indicating that we could be entering an unprecedented period of price stability.
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