Bitcoin Trades Sideways as US Inflation Is Muted

January 13, 2021

The top stories in bitcoin, crypto and more – all in one place, delivered daily.

Sponsored By:

By Daniel Kuhn

If you were forwarded this newsletter and would like to receive it, sign up here.

Top shelf

Hello. Analysts are reporting gloomy short-term projections for bitcoin as the U.S. Labor Department reports muted inflation over 2020. Here's the story:

Institutional products

A new, physically backed bitcoin exchange-traded product (ETP) has hit the SIX stock exchange in Switzerland. Developed by ETC Group, this is the 34th bitcoin ETP on SIX. Meanwhile, the Winklevoss-owned Gemini Trust company is backing the latest bitcoin exchange-traded fund (ETF) application filed in Canada. Arxnovum Investments’ bitcoin ETF could conceivably trade on the Chicago Mercantile Exchange, if approved. U.S. regulators have long been skeptical of these “high risk” investment vehicles, which many point to as hampering institutional interest (by the way, check out Blockwork’s new editorial site).

Stopping bitcoin ‘funny business’...

European Central Bank (ECB) President Christine Lagarde has called for bitcoin to be regulated at the international level, during a Reuters event. The “highly speculative asset” has led to "some reprehensible activity," including money laundering, and any loopholes need to be closed, according to a report from Reuters. Meanwhile, crypto’s favorite regulator, Brian Brooks, the acting head of the U.S.’ top bank regulatory agency, is reportedly ending his term this week, while crypto-knowledgeable Wall Street and CFTC vet Gary Gensler is expected to be named chairman of the SEC.

Gloomy projections?

Analysts are gloomy about bitcoin’s short-term price outlook, with several pointing to increased flows onto exchanges and cooling institutional demand. Some 57,000 BTC moved onto exchanges Tuesday, the biggest-single day change since the markets crash on March 12, 2020. A Goldman Sachs exec said institutional investors are “key” to curbing bitcoin’s volatility. Neither bitcoin’s 20% drop on Monday, nor its volatility, have stopped “whales” from buying the dip.

SPONSORED BY NEXO

Your digital assets deserve a savings account in their BEST INTEREST. Leading crypto lender Nexo treats you, your crypto and your fiat to industry-best Crypto & Fiat services, featuring:

* Up to 12% interest on digital assets, paid out daily!

* Yields available on BTC, ETH, LTC, BCH, XRP, XLM, EOS, TRX, LINK, BNB, PAXG, USDT, USDC, TUSD, PAX, DAI, HUSD, GBP and EUR.

* No minimum or maximum limits on funds deposited, offering infinite opportunities to earn.

* Full flexibility with no lock-in periods, so you can withdraw your funds anytime.

* #ZeroFees on all transactions.

* Military-grade wallet security and top-tier insurance on all custodial assets with SOC 2 Type 2 certified crypto custodian BitGo.

Get started at nexo.io.

Quick bites

Market intel

Alt season?

Bitcoin and ether prices are about 87% and 78%, respectively, of their all-time highs, though the majority of altcoins (smaller market cap cryptocurrencies) are languishing. While some altcoins have spiked during the recent market run-up, retail investors have largely ignored these cheaper, and riskier, cryptos. That said, Messari found tokens embedded in the decentralized finance (DeFi) market – like Maker (MKR), Compound (COMP), Aave (AAVE) and Uniswap (UNI) – are seeing robust growth.

Q4

If Q1 2020 was the quarter of market turmoil, Q2 the bitcoin halving and Q3 the explosion of stablecoins and decentralized finance applications, Q4 was the quarter of institutional FOMO for bitcoin and of Ethereum launching the first phase of its ambitious migration to a proof-of-stake (PoS) blockchain.

The latest CoinDesk Quarterly Review looks at the performance of bitcoin and ether compared to macro assets and other crypto assets, and at their progress, milestones and value drivers over the past three months. Download the free report.

At stake

Inflation projections

Much of bitcoin’s growth in 2020 was driven by institutional investors turning to the hard-capped, deflationary asset as an inflation hedge. Hedge fund legend Paul Tudor Jones, Microstrategy’s Michael Saylor and Guggenheim Partners Chief Investment Officer Scott Minerd, among others, have all spoken on bitcoin’s prospect as “digital gold.”

Fiscal stimulus and looser monetary policy in response to the coronavirus pandemic drove up inflation projections. Indeed, rates for U.S. Treasury bonds have been ticking up higher in recent days, crossing 1% last week, on calls for additional government spending – such as President-elect Joe Biden’s plan to inject “trillions of dollars” through an economic recovery package.

But the line of sight on inflation is anything but clear. The U.S. Labor Department reported today that a key measure of inflation, the Consumer Price Index (CPI), only increased 1.4% in 2020, the smallest yearly gain since 2015. For reference, 2019’s CPI rose 2.3%, while the 10-year average is estimated at 1.7%.

This is far below the Federal Reserve’s 2% inflation target. Last year, Fed Chair Jerome Powell signaled it would reverse course and allow the economy to run hot – above 2% – for periods, acknowledging the economy has missed this target for the last decade. Some investors and analysts are skeptical of any forthcoming change. Kathy Bostjancic of Oxford Economics, for one, is quoted in Barron's casting doubt on the prospect of a rate increase before 2024.

Bloomberg urged readers to “Get Ready for the Great U.S. Inflation Mirage of 2021,” with economists Carl Riccadonna and Yelena Shulyatyeva quoted as saying, “2021 will be a year plagued by numerous unwarranted inflation scares. Consumer inflation will remain weak over the medium term -- until the economy fully absorbs the slack resulting from the pandemic.”

Still, St. Louis Federal Reserve President James Bullard said Wednesday that inflation is likely to rise. Speaking at a Reuters conference, Bullard said the “money supply has ‘exploded,’ fiscal deficits are ‘off the charts’ and a hot economy may either already be here or ‘just around the corner,’” according to a Reuters report.

Ian Shepherdson, chief economist of Pantheon Macroeconomics, told CoinDesk over email he projects “a clear uplift to 2.5%-plus in Q2.” Though, “the key question of what happens when the economy reopens fully remains unanswerable at this point.”

So what does this mean for bitcoin and the rest of the crypto market table?

Well, unlike highly liquid and tradable assets like U.S. Treasury bonds that reflect any minute change in inflation projections, bitcoin often does its own thing.

Correlated with stocks and other traditional assets, bitcoin has largely followed the herd in price swings, although in a bull market, with the highest volatility in three years, anything is possible. On Monday, bitcoin shed 20% only to bounce back. And while analysts have grim short-term outlooks, many are convinced there’s still money sitting on the sidelines.

“Recent institutional investors have long horizons and will absorb near-term price shocks,” while retail investors would buy at discounted price levels for fear of missing out, Jehan Chu, managing partner at Hong Kong-based Kenetic Capital, told CoinDesk’s Omkar Godbole. “Expect temporary volatility and then a jump back to the $40,000 level, followed by $50,000 as the bitcoin percentage land grab continues.”

Who won #CryptoTwitter?

ATTENTION: Scammers have been sending fraudulent emails with links to sites disguised to look like coindesk.com. If you are in doubt about a link, type https://www.coindesk.com directly into your browser; do not copy and paste. Remember, if something seems too good to be true, it probably is.

Blockchain Bites

A newsletter from CoinDesk

See Previous Editions

Copyright © 2020 CoinDesk, All rights reserved.

250 Park Avenue South New York, NY 10003, USA

You can manage your preferences here or unsubscribe from all CoinDesk email.