Is Bitcoin ready to drag the entire crypto market into the greed zone again? Currently neutral, market sentiment is rocked by the poor inflation report. Still, many indicators point to a recovery, including ongoing discussions by financial regulators about regulating, not banning, digital assets.
US economy: inflation hits 7.5%
This Thursday, it was not the Federal Reserve that upset the markets but the Labor Department. The federal agency delivered a worse-than-expected inflation rate, represented by the consumer price index (CPI), at 7.5%. This is the largest annual price increase in 40 years, since February 1982.
Markets reacted with a uniform decline, from the Nasdaq and S&P 500 to inflation hedges such as gold and Bitcoin. However, unlike the others, Bitcoin recovered quickly, rebounding to a high of $45.6,000.
Nevertheless, Bitcoin’s close correlation once again shows that many new Bitcoin investors are following in the footsteps of traditional investors. Despite Bitcoin’s reputation as an inflation hedge, they have traditionally responded to record inflation, leaving risky assets behind – traditionally tech stocks.
Gold, a traditional hedge against inflation, also plunged, indicating greater economic uncertainty and eroding confidence in the dollar. The question is, where does this put Bitcoin in the long term?
Where is the interest of bitcoin investors?
For Bitcoin to continue its upward trajectory, it must continue to attract investors. This creates buying pressure due to its illiquid 75% offer and also increases its price.
Alex Kuptsikevich, senior financial analyst at FxPro, told Forbes:
“Simply, [Bitcoin’s] price is determined not so much by volatility as by crowd interest. Without investor interest, it quickly turns sour, and with that, it picks up just as quickly. In favor of bitcoin, there is the reduced growth rate of supply and its finiteness.
Of course, this favor is the main feature of Bitcoin: a decentralized finite supply that does not lend itself to the central bank, which has led to record inflation. Although Bitcoin is currently more correlated with the Nasdaq than anything else, institutional investors can count on the fact that the price of BTC rose 52 times after its second halving in 2016.
For this reason, Bitcoin whales have accumulated over the past two months, adding 220,000 BTC since December 23, 2021. Analytics firm Santiment notes that this is the largest Bitcoin whale accumulation since September. 2019.
CoinShares weekly asset flow into crypto assets also shows a trend reversal. Three weeks in a row, the inflow was positive, totaling $133 million, of which $108 million went to Bitcoin.
Led by Ethereum, smart contract platforms are still in the bearish zone, with only Solana and Cardano remaining in positive flows year-to-date (YTD). A total of $52.4 billion in digital assets under management (AuM) are reported as of February 4, 2022.
Then we have asset manager Fidelity with $4.2 trillion in assets under management, stating in its Bitcoin First report that Bitcoin is not just a speculative asset, but a new monetary infrastructure for building services. financial.
This accumulation of layers is best exemplified by Betterment’s acquisition of crypto startup Makara. As an automated wealth management platform, Betterment will give crypto access to its 700,000 customers. Although the Fed is set to increase interest hikes, suppressing inflation will not necessarily work.
This means that more and more people will be looking for a way to convert the USD into an asset with a finite supply and long-term upward trajectory. Easier access through institutional adoption and greater utility with Bitcoin’s SegWit/Taproot upgrades, then, is just icing on the cake.
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FDIC sees growth in crypto and prioritizes regulation
Asset managers and wealth advisory firms aren’t the only ones with a bullish view of Bitcoin. Federal Deposit Insurance Corporation (FDIC), the federal agency responsible for regulating banks, considers 2022 the year of crypto. FDIC Chairman Martin J. Gruenberg issued a statement on Feb. 7, noting that while crypto assets can introduce “risks to the financial system,” it would be riskier not to regulate them.
“To the extent that these activities can be conducted in a safe and sound manner, agencies will need to provide strong guidance to the banking industry on managing the prudential and consumer protection risks raised by crypto-asset activities.”
This is consistent with the previous statement made last October by FDIC Chairwoman Jelena McWilliams.
“If we don’t bring this activity inside the banks, it will grow outside the banks…Federal regulators won’t be able to regulate it.
In other words, the long-held tropes of crypto assets as gateways to money laundering and the criminal underworld are in the rearview mirror. In their place, a new narrative is being formed in which the demand for digital assets is such that it can no longer be ignored.
India and Russia have both come to the same conclusion. India abandons plans to ban crypto and instead impose a flat tax rate of 30%. Similarly, President Putin rescinded the Russian Central Bank’s request for a sweeping ban. The largest nation by territory size will go further and recognize cryptocurrencies as such instead of commodities.
The regulatory effort in the United States is still ongoing. However, this week’s committee hearing on “Examining Digital Assets: Risks, Regulation and Innovation” resulted in a bipartisan agreement that markets and investors must be protected. In the words of Senator John Boozman (R-AR):
“There is a gap in monitoring digital assets. This poses a danger to the American consumer and could threaten the resilience of our financial markets if left unchecked. We have an opportunity here to broaden participation in our financial markets, but this must be accompanied by consistent rules of conduct that protect investors and our markets,”
Which legislative direction this bipartisan sentiment takes will largely determine the direction of the crypto market in the months to come.
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About the Author
Tim Fries is the co-founder of The Tokenist. He has a B.Sc. in Mechanical Engineering from the University of Michigan and an MBA from the University of Chicago Booth School of Business. Tim was a senior partner on the investment team in the US Private Equity division of RW Baird and is also a co-founder of Protective Technologies Capital, an investment firm specializing in detection, protection and control solutions.