Unprecedented drop in Bitcoin as US inflation exceeds estimates at 8.3%.

Bitcoin and Ethereum have been hit hard by falling inflation data. The Bureau of Labor Statistics released the latest Consumer Price Index report on Tuesday, showing that the price of goods rose 8.3 percent on an annual basis in August.

The 8.3 percent figure exceeded economists’ expectations of a slowdown to 8.1 percent. It marks a 20 basis point drop from July’s figure. CPI rose 0.1 percent month-over-month. According to the report, rising costs for housing, food, and medical care were the main drivers of the increase in all items. Gasoline prices, meanwhile, declined.

Markets reacted to the print in a typically panicked manner. S&P500, Dow Jones and Nasdaq futures all fell before the U.S. market opened. Bitcoin also fell sharply in response to the print, slipping 3.3 percent to about $21,604. Ethereum was hit harder, falling 5.8 percent to about $1,643. These declines are likely due to the fact that the print exceeded expectations of a 40 basis point drop.

Inflation has been a major concern for households in the United States and around the world this year as countries struggle with rising prices across the board. One of the main factors contributing to this rise is the increase in energy prices, in part due to Russia’s invasion of Ukraine.

With the rise in the price of goods, central banks around the world responded by raising interest rates in an effort to curb inflation. In the U.S., the Federal Reserve indicated that it would take a hawkish stance at the end of 2021, which threw a wrench into the crypto and global markets. Since then, the Fed has raised interest rates multiple times to current levels between 2.25% and 2.5%. The Fed has repeatedly indicated that it is targeting a 2% inflation rate and central bank chairman Jerome Powell warned of more “pain” ahead during his speech in Jackson Hole last month, which could mean more hikes are on the horizon. Powell is expected to announce another 75 basis point hike at next week’s FOMC meeting.

Crypto, the Fed and CPI

In recent months, the markets have paid close attention to the Fed and CPI numbers. Since the Fed embarked on its rate hike plan, the rising inflation numbers have caused tremors in the markets. This is because higher rates increase the cost of borrowing, which tends to penalize risky assets as investors seek refuge in traditional currencies such as the dollar. For example, when June’s CPI came in at a 40-year high of 9.1, bitcoin and ethereum suffered sharp declines.

However, as inflation numbers cooled, assets like bitcoin rallied. Also, somewhat counterintuitively, investors reacted positively to the Fed’s latest interest rate hike. This is likely because a 75 basis point hike was less than some initially feared.

The unstable macroeconomic environment, punctuated by rising prices and a hawkish Fed, has been one of the main factors behind the fall in crypto prices for months. The capitalization of the global crypto-currency market surpassed $3 trillion as other markets hit all-time highs in November 2021; today, the space is worth closer to $1.1 trillion.

With its 21 million coin supply cap, bitcoin has often been touted as an inflation hedge (inflation was a major argument during its early rally, and has remained key to bitcoin’s value proposition as other cryptoassets tout use cases like smart contracts). However, it has been proven time and time again to trade in correlation with traditional markets, especially this year. Even though rare crypto-assets like bitcoin are a bet against inflation, they tend to react to rising prices like traditional stocks over short-term periods. While inflation has subsided with the Fed poised to announce further hikes, crypto-currency enthusiasts may be waiting a while for bitcoin to have its next moment of glory.