Effect of CPI Inflation on Bitcoin Price

2023-08-22, 13:12

TL; DR

The price of Bitcoin often increases before and after the release of CPI inflation data.

Between 6 and 9 August the BTC price increased by about 4% as the market awaited the CPI data.

There was an increase in BTC transactional volume between 6 and 9 August.

Introduction

When the date of the next Consumer Price Index (CPI) announcement drew closer the market expected the Federal Reserves to refrain from further interest rate hikes. Already, the market expects to have Fed rate cuts by 2024. This article explores the possibility of a Bitcoin rally after the announcement of CPI inflation data on 10 August.

Bitcoin Response to CPI Inflation Announcements

The Federal Reserve’s announcement of the CPI inflation data often leads to changes in prices of major stocks and cryptocurrencies like Bitcoin. The increase in bitcoin adoption among institutional investors and governments is the major reason its price responds to the announcement of CPI inflation data. For instance, in July when the CPI data was released on the 12th the price of Bitcoin increased by 4% to attain a new monthly peak of $31,500.

Currently, economists expect a month-to-month increase of 0.2% and a year-over-year inflation to rise by 3.3%. Already, the headline inflation, which is not adjusted for seasonal factors and which tracks the price changes for volatile products like food and fuel, is likely to increase as well.

On the other hand, the core CPI is likely to rise to 0.2% in July while the annual Core CPI is likely to fall from 4.8% to 4.7%. Depending on the actual figures on the day of the CPI announcement the value of BTC is likely to change by a very small margin. Although the value of Bitcoin has increased by about 75% this year, it is still 58% lower than its all-time-high it attained in 2021.

Will the Value of Bitcoin Rise?

Many investors would like to know the probability that the value of Bitcoin may rise after the CPI data announcement. During the past months the BTC price had increased following the decrease in the rate of inflation. For example, when the Fed released the inflation figure of about 1% in July, the price of bitcoin rose by 4%.

Similarly, it increased by about 5% within a week before the announcement. There was a similar BTC price movement in August, a few days before the CPI data was released. Its price rose by 4% between 7 and 9 August.

Bitcoin Transaction Volume Increases before the CPI Inflation Data Release

Apart from the decent rise in BTC price in August, its transactional volume also increased. A few days before 10 August the volume of bitcoin rose remarkably as the market anticipated a fall in the CPI figure or at least a mild increase.

The on-chain data shows that bitcoin’s transaction volume increased by almost 104% between 6 and 9 August, showing a possible rise in BTC investment. Specifically, bitcoin transactions increased from 147, 670 on 6 August to 302,500 on the 9th. The following diagram gives a visual effect of what transpired.

Increase of Bitcoin Transaction Volume in August 2023 - Santiment

As The Graph indicates, bitcoin transactions increased remarkably within 4 days. A persistent increase in a cryptocurrency’s transaction volume is a bullish signal. Therefore, it is likely that the price of bitcoin may increase after the CPI data.

Increase in Exchange Reserves

Another signal that shows a possibility of BTC price rise after the CPI data release was a decrease in bitcoin exchange reserves. In fact, BTC investors moved a total of 14,500 coins off the exchanges during the first 9 days of August. The decrease in the quantity of bitcoin on the exchanges creates a short-term shortage which is likely to push its price up. The next diagram shows the fall in the quantity of bitcoin on exchanges in the same period.

Decrease of BTC Exchange Reserves - CryptoQuant

The exchange reserves show the change in the quantity of bitcoin on the public exchanges. A fall in the BTC exchange reserves indicates that investors are willing to hold their coins.

Bitcoin Price Predictions: $32,000 in Focus

The In/Out of Money (IOMAP) data indicates that the BTC bulls may take advantage of the CPI data release to increase the buying pressure which may push its price towards $32,000. According to the data, the distribution of BTC purchases of most coin holders in the first 9 days of August was within the 20% price range.

Nevertheless, before the BTC bulls would target the $32,000 price level they should first increase the buying pressure to push the value above $30,400. This is because most BTC holders acquired the coins at a maximum price of $30,404. Therefore, if the CPI data is favourable bitcoin might get into an accumulation zone before moving towards $32,000.

On the contrary, if the BTC bulls slacken the bears may push its price below the $28,000 level. Nevertheless, the 1.92 million addresses that acquired 933,600 BTC at an average price of $28,583 might create bearish pressure that may result in a rebound. The saddest scenario would be for the price to fall toward $27,500.

Usually, the periods before and after CPI inflation data releases give crypto investors the opportunity to buy Bitcoin. However, such events may also create opportunities for BTC investors to sell their holdings.

Conclusion

The market has expected the price of BTC to rise after the CPI data set to be released on 10 August. Whereas the bulls are likely to push its value to $32,000 the bears may force it down towards $27,500. Basically, though, the value of bitcoin often fluctuates sharply before and after the release of the CPI data.

Author: Mashell C., Gate.io Researcher

*This article represents only the views of the researcher and does not constitute any investment suggestions.

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