High Inflation: Why Bitcoin and Gold Are Still Down

Since the start of 2022, Bitcoin has fallen for seven straight days. From the highest point of $47,954/piece on January 1 to the lowest point of $40,610/piece on January 7, a decrease of 15.3%. The current price of Ethereum is $3,212 per piece, which has fallen by 17.6% since the beginning of the year.

Market confidence was affected. On January 8, the Bitcoin Fear and Greed Index (FGI) was 10, down 8 points from the previous day. The degree of panic intensified, and the level was still “extreme panic”. The last time the FGI index was 10 was in June 2021.

It can be said that the entire cryptocurrency market is in a downturn . Unlike the sudden plunge in December, the adjustment of the cryptocurrency market has been going on for some time, and the reasons for the decline are closely related to the global financial market. Non-farm unemployment rate improved in December 90% of Fed hiked interest rates in March

The U.S. non-farm payrolls report released on the evening of January 8 showed that the number of non-farm payrolls increased by only 199,000 after the non-agricultural seasonal adjustment in December, the smallest increase since January last year and far below the expected 400,000. The value was revised up to an increase of 249,000 from an increase of 210,000. At the same time, the unemployment rate was recorded at 3.9% in December, which was significantly lower than the expected 4.1%.

Economic easing measures such as the unemployment rate, U6 underemployment and participation rates all showed further improvement, and wage growth was stronger than expected, despite a weaker-than-expected job growth in December. In addition to the main data, wage growth also far exceeded expectations, up 0.6% month-on-month and 4.7% year-on-year. January’s wage data was also revised up, and the labor force participation rate was stable at 61.9%. All in all, the jobs report paints a good economic picture. Not only has the unemployment rate fallen, the labor force participation rate has remained the same, and the overall size of the labor force has expanded.

U.S. federal funds futures show a 90 percent chance the Fed will raise rates at its March meeting after U.S. jobs data. Analyst Chris Anstey also commented that, all in all, nothing will stop the Fed from considering a rate hike in March.

After the data was released, the yield on the 10-year Treasury bond hit 1.771%, continuing to refresh the highest level since March 2021. The US dollar index plunged 20 points in the short-term, and non-US currencies generally rose. Spot gold fell by $10 to $1,789.18 an ounce in the short-term. The three major U.S. stock indexes collectively turned lower. Bitcoin fell instantly by $2,196 to $40,565 per piece.

Regarding the continued downturn in this round of global financial markets, investors generally believe that it is related to the Fed’s plan to raise interest rates ahead of schedule. Bitcoin has also been dragged down by expectations that precious metals prices may fall further.

We can look back at the minutes of the December FOMC meeting released by the Federal Reserve at 3:00 am Beijing time on January 6. The minutes showed that many participants believed that the speed of the reduction of the balance sheet should be faster than the speed of the previous round of monetary policy normalization. After the minutes of the meeting were released, the global financial market also quickly responded to the Fed’s early interest rate hike. The yield on the 10-year U.S. Treasury bond rose rapidly, while gold and silver fell in response. On the same day, Bitcoin fell by more than 9%, from $46,615/piece to $42,416/piece.

The Fed’s early reduction of debt and interest rate hikes means that the pace of slow interest rate hikes previously expected by investors may be accelerated, and the pace of global water release due to the epidemic will be slowly stopped. The latest minutes mentioned “accelerating the reduction of the monthly net asset purchase scale”, and the expectation of interest rate hikes continued to increase. Once the Fed officially starts to shrink its balance sheet and raise interest rates to “cool down” the market, risk assets including the stock market and currency market are expected to fall.

This round of decline

Or confirm that Bitcoin is a risk asset rather than a safe-haven asset?

Since the outbreak of the new crown epidemic in 2019, with a series of economic stimulus measures introduced by various countries, Bitcoin has risen by more than 500%. But bitcoin has seen a flash crash since the Fed hinted at earlier and faster rate hikes.

Stephane Ouelette, CEO and co-founder of cryptocurrency platform FRNT Financial Inc., said in response to the rapid decline of Bitcoin in this round. “ Despite secular trends around inflation, preservation of value, etc., the knee-jerk reaction to cryptocurrencies tends to see them as purely risky assets. ”

The Fed’s “hawking”, for cryptocurrencies, the logic of the fall transmission lies in the fact that under the background of the global water release due to the beginning of the epidemic, some market funds are worried about the inflation problem caused by the over-issue of currency, and they have purchased risky assets to fight inflation expectations. So since 2020, not only U.S. stocks have hit new highs, but cryptocurrencies led by Bitcoin have also risen, breaking the trillion-dollar market value in one fell swoop.

But since 2022, Bitcoin’s market performance has ranked at the bottom of the major asset classes. According to Wind data, among the major asset classes in the world, Bitcoin ranks last with a decline of -9.09%. In 2021, Bitcoin ranks first with a yield of 57%. With bitcoin being so volatile , David Donabedian, chief investment officer at CIBC Private Wealth Management, said by phone, “ It’s a speculative investment and volatility is going to stay high for a long time. ” 

After being classified as one of the risk assets by the market, cryptocurrencies are directly affected by the global financial market. The trend performance of precious metals is also not very optimistic. Gold once fell below US$1,800, and the spot price was temporarily reported at US$1,796.63 per ounce as of press time.

Why did gold, which is rated as a safe-haven asset, also suddenly fall? Analysts believe that gold fell below $1,800 again, which is related to changes in the interest rate market.

The recent remarks by the two chairmen of the Federal Reserve have increased the market’s expectations for the Fed to raise interest rates. The increase in market interest rate hike expectations will put pressure on gold . Low interest rates often correspond to high gold prices, and high interest rates often correspond to low gold prices.

In the case of rising interest rate expectations , the nominal yield of U.S. Treasury bonds has risen sharply, causing the breakeven inflation rate in the interest rate market to drop, and gold has suffered a relatively large selling pressure .

Originally, gold lacked motivation when it stood firm in the $1,850 range. In the case of rising interest rate expectations, gold immediately retreated sharply. As an amplifier of gold’s trend, silver fell even more, and the optimism in the precious metal market disappeared.

In the case of high inflation, the U.S. economy can be said to have entered a stage of stagflation. In the stagflation cycle, inflation has been at a high level, but the economy has not actually grown. At this time, cash is king . Therefore, gold as a safe-haven asset did not have much momentum to rise under the dual pressure of a strong dollar and rising real yields.

A few days ago, Dr. Craig Wright expressed his views on Bitcoin, gold and cash. In the article, he said that current digital currency exchanges, such as Coinbase, operate in the same way as the so-called gold-standard banking system. When you trade on most digital currency exchanges, you are not trading real digital currency. 

“Coinbase, Square, and other speculative shops that acted as banks while flouting laws and removing consumer protections turned the financial system into a casino—where they acted as gatekeepers to a virtual Fort Knox. They kept records of digital gold. But , like Fort Knox, no one knows what they hold.” Therefore, Dr. Craig Wright believes that Bitcoin cannot be considered digital gold. At least at this stage, he prefers to discuss bitcoin as a risk asset or commodity.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/high-inflation-why-bitcoin-and-gold-are-still-down/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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