BTC Sells off Sharply in Response to Global Inflation Fears
Bitcoin (BTC) sold off sharply in Friday trading, and was recently trading below $21,500, down more than 8% over the last 24 hours. The largest cryptocurrency by market capitalization is down 13% for the week.
The decline started during overnight trading, coinciding with unexpectedly high inflation data in Germany. Germany’s annual producer inflation figures rose to a record high of 37% in July, versus expectations of 32%. Producer prices reflect the price of goods and services sold by manufacturers for a region. The German PPI data is analogous to U.S. PPI data. The United States’ July PPI reading was 9.8%, by comparison.
Following the announcement, the probability of the U.S. Federal Reserve raising the federal funds rate 75 basis points increased to 44.5% from 41% a day earlier, according to the CME FedWatch tool.
Ether’s (ETH) price fell similarly, declining 8% on the day and 13% for the week. Altcoins recently dropped sharply, with SOL falling 10% while AVAX and MATIC declined 11% and 12%, respectively.
Traditional markets sold off to a lesser extent, with the Dow Jones Industrial Average (DJIA) falling 0.8%, and the S&P 500 and tech heavy Nasdaq composite declining 2.1% and 1.3% respectively.
Gold, generally viewed as a safe haven against inflation, declined in price by 0.6%, while energy markets saw crude oil decrease 0.32% and natural gas increase 1.1%. Prices for copper futures rose 0.9%.
●Bitcoin (BTC): $21,257 −9.1%
●Ether (ETH): $1,690 −9.8%
●S&P 500 daily close: 4,228.48 −1.3%
●Gold: $1,761 per troy ounce +0.3%
●Ten-year Treasury yield daily close: 2.99% +0.1
Bitcoin, ether and gold prices are taken at approximately 4pm New York time. Bitcoin is the CoinDesk Bitcoin Price Index (XBX); Ether is the CoinDesk Ether Price Index (ETX); Gold is the COMEX spot price. Information about CoinDesk Indices can be found at coindesk.com/indices.
Overnight reaction to inflation data sends markets into oversold territory
Bitcoin took a significant downward turn overnight, reacting poorly to unexpectedly disappointing inflation numbers from Germany.
BTC’s hourly chart shows a 4% decline at 06:00 UTC, about the same time as the release of Germany’s PPI data. The report adds to market fears that the U.S. Federal Reserve and other central banks will take aggressive measures to stem inflation, which would likely have a negative impact on asset prices.
The BTC hourly chart below illustrates the time of the German PPI announcement, in conjunction with the drop in BTC prices. The decline came along with excessive volume for the 06:00 UTC hour, when compared to BTC’s 20-hour moving average. The decline also occurred within a price range with lower volumes historically. The Volume Profile Visible Range tool (VPVR), applied to BTC’s hourly chart shows a collection of “low volume nodes” between $22,000- $21,000.
The VPVR tool measures levels of activity at specific price levels, and can show areas where price agreement occurs. Low volume nodes represent areas of lower activity, and often represent areas of increased price volatility.
BTC’s Relative Strength Index (RSI) on the hourly chart plunged to oversold levels following the price decline. The RSI is a widely used technical indicator that measures price momentum. Readings of 70 and higher implies that an asset is overbought (i.e., overvalued), while readings of 30 or below imply that an asset is oversold (undervalued). BTC’s current RSI is 29.23.
Focus on put options at $21,000
The Aug. 16 Market Wrap highlighted BTC options open interest. Given today’s decline, note the concentration of put options at $21,000, which have increased to 3,300 BTC (previously below 2,000 BTC). A put option represents the option but not the obligation to sell an asset at a specific price.
Should BTC prices decline below $21,000, traders holding puts at $21,000 have motivation to exercise their right to sell BTC, which would put additional downside pressure on BTC.
Bitcoin’s daily chart shows a potential tug of war at the $21,000 mark
The VPVR tool on BTC’s daily chart shows a significant amount of price agreement at the $21,000 mark. Technical readings and open interest in derivatives markets imply that $21,000 is the mark where bullish and bearish BTC investors will face off.
Along with being a “high volume node,” $21,000 illustrates the “point of control,” illustrated by the red line in the chart below. The point of control within the VPVR tool indicates where the highest amount of price agreement occurs, and can often represent points of support and resistance.