'Interest Rate Faction' and 'Inflation Faction' Contest: Weekly Market Review From TokenInsight

With the October retail sales rate in the United States, the Philadelphia Federal Reserve manufacturing index and the European CPI, PPI data released, the divergence between investors in the crypto market for early interest rate hikes and anti-inflation demand has increased, and the contest between the two groups of investors has caused market volatility to rise by more than 15% this week.

Under the combined influence of regulatory and other factors, the "interest rate faction" has temporarily gained the upper hand, with mainstream crypto prices falling by more than 10% this week.

The contest between the "interest rate faction" and the "inflation faction" will become the main factor affecting the performance of the crypto market in the future.

The Sell-off of Risky Assets Triggered a Sharp Drop In the Market

For the crypto market, the increased possibility of raising interest rates in advance is not good news. As the Federal Reserve begins the process of debt reduction, the recovery of the US economy has significantly increased the possibility of raising interest rates in advance, while the provisions related to the taxation of cryptos in the new US infrastructure bill have further hit investors’ confidence.

As the US dollar strengthened to good economic data, the prices of non-US dollar assets all depreciated sharply, and cryptos became the first target for investors to sell. This week, mainstream cryptos once showed a decline of more than 10%, triggering derivatives clearing scale of more than $2 billion, and market volatility also generally increased, including BTC volatility increased by 18.9%, and ETH volatility increased by more than 42%.

The dominance of the "interest rate faction" in the crypto market has also affected market expectations, resulting in significant changes in the term structure of futures premiums. The high premium of recent futures has disappeared, and investors have also maintained a cautious attitude towards the medium and long term, resulting in a flat curve structure. However, compared with some time ago, the premium curve has moved down as a whole, indicating that investors are worried about the increase in interest rates, making them unwilling to pay a higher premium for the uncertainty in the long term.

From the perspective of the options market, both in the short and long term, the skewness of options gathered near the midline this week, indicating that the optimism of the market began to decline.

Inflation Affects the Floor, While Interest Rates Determine the Ceiling

Supervision has "contributed" to the performance of the crypto market this week. On the one hand, the U.S. Infrastructure Act was passed this week and is ready to enter the implementation phase. In the bill, the high tax on the crypto market has raised the cost expectations of investors holding cryptos and engaging in related businesses. In addition, this week $56m of cryptos were sold by the US Department of Justice to compensate the victims of cases related to encrypted currencies, putting some pressure on the market. India, Russia, and other countries are also seeking closer supervision of cryptos, including denying their payment function and treating them as investment products, and implementing supervision through the relevant regulatory framework for asset transactions.

However, the improvement of the economic situation may be the key factor affecting the market. Due to the good performance of various economic data this week, the Federal Reserve's worries about inflation make it seek a faster rate of debt reduction. Federal Reserve Board member Waller said that inflation conditions have met the demand for interest rate hikes. Considering that the market is skeptical about whether the Federal Reserve can control inflation, he hopes to speed up the debt reduction process, complete the debt reduction in early April and start raising interest rates in the second quarter. Williams, another member, also held a similar attitude. Clarida, vice chairman of the Federal Reserve, also expressed support for accelerating debt reduction.

It is worth noting that Waller said in his speech that bitcoin "can be regarded as electronic gold", which means that the Federal Reserve characterizes bitcoin as a "haven asset" and the performance of haven assets is highly negatively correlated with interest rates. Considering bitcoin's position in the crypto market, this undoubtedly determines the upper limit of the performance of the crypto market.

However, as global policymakers push for easy monetary policy, whether it is the European Central Bank's stance on inflation, Japan's huge spending plan, or the US reconstruction plan, everything implies that there will be more liquidity in the system in the future. This has also pushed crypto market bulls, and worries about inflation have re-emerged because of these catalysts. It is worth noting that U.S. inflation expectations measured by the 10-year break-even inflation rate of the St. Louis Federal Reserve also supported the recent U.S. Treasury bond yields. The persistence of inflation expectations is an important reason why cryptos have not seen a "destructive decline", while investors' risk aversion has supported the lower limit of the crypto market.

It can be predicted that investors' judgment on the impact of interest rate and inflation on the market will continue to affect the performance of cryptos for some time to come. However, due to the support of anti-inflation demand for the lower limit, whether the lower limit will be broken down in the future depends on whether economic data continue to improve and are sufficient to weaken anti-inflation demand. Next week, the release of a series of performance data related to economic recovery (including the annualized quarterly rate of real GDP in the United States) will bring a clearer answer to the future trend of the crypto market.