The S&P 500 index is currently trading only 6% below its all-time high, which was reached in January 2022. This would typically be viewed as a positive sign for risk-on assets like commodities and cryptocurrencies. However, in a unique twist, investors have been using the stock market as a means of protection against the recent surge in inflation.
Between April 2021 and May 2023, inflation has been sustained at over 4%, causing concerns among investors. Traditionally, inflation has been viewed as a positive factor for Bitcoin and other cryptocurrencies, as evidenced by the previous all-time highs in 2021. During a period of monetary expansion and increasing inflation, Bitcoin reached highs of $65,000 and $69,000. However, the current situation is different because inflation is making a comeback while the Federal Reserve has been reducing liquidity in the system. As a result, the impact of inflation on cryptocurrencies remains uncertain.
One of the notable developments in the market is the decline of tech giants in recent days. Companies like Fortinet, Block Inc., PayPal, Shopify, and Palo Alto Networks have seen significant drops in their stock prices. This decline has caught the attention of investors, especially considering the expectation of an additional interest rate hike by the Federal Open Market Committee in September.
Economists predict that the Consumer Price Index for July will be around 3.3%, surpassing the previous month’s figure of 3% and exceeding the central bank’s 2% target. With the unemployment rate at a 40-year low, there is increasing certainty that the Fed will move towards tightening the economy.
In terms of traditional safe-haven assets, gold has struggled to surpass the $2,000 mark multiple times since 2020. This lack of confidence in gold as a hedge against risks is a sign that investors are seeking alternative markets.
Even bonds, another traditionally safe asset, are losing appeal due to the ongoing increase in the United States federal debt. Investment mogul Bill Ackman reportedly shorted 30-year U.S. Treasury bonds, expressing concerns about long-term inflation. The U.S. Treasury Department also revealed a $1 trillion quarterly net borrowing estimate, further fueling concerns in the financial markets.
Amidst these developments, Bitcoin whales have increased their leverage long positions using derivatives, despite the cryptocurrency’s price remaining around $29,500. This suggests that investors are seeking alternative markets and finding support in Bitcoin.
Bitcoin futures typically trade at a slight premium relative to spot markets, known as contango. Currently, the BTC futures premium on platforms like Deribit and OKX is at 8%, the highest in over three weeks. This higher premium indicates a positive sentiment towards Bitcoin.
Traders can also gauge market sentiment by measuring whether more activity is going through call options or put options. Currently, the put-to-call ratio has been below 1.0 since July 24, indicating a strong demand for call instruments and suggesting investor optimism for Bitcoin’s potential price appreciation.
In conclusion, while the current surge in inflation and market uncertainties have led investors to use the stock market as a mean of protection, the impact on cryptocurrencies remains uncertain. However, there are indications that Bitcoin may benefit from the inflation surge. In the short term, there is solid support for Bitcoin at the $29,000 mark. As the situation evolves, investors will continue to monitor these factors and make decisions accordingly.