The largest cryptocurrency is seen by many digital-asset investors as a hedge against inflation, and so the price reaction led to some head-scratching among Wall Street analysts. That’s been the case for the past couple months as the U.S. Bureau of Labor’s consumer price index (CPI) accelerated, with the price of bitcoin (BTC, -3.07%) tumbling to about $32,800 now from an all-time high near $65,000 in April.  

“Interesting that as CPI inflation has climbed from +1.4% y/y in January to 5.4% in June, bitcoin has essentially been cut in half,” Liz Ann Sonders, chief investment strategist at Charles Schwab, tweeted. 

Cryptocurrencies:

Traditional markets:

Looking at the larger macroeconomic picture puts bitcoin’s price action into perspective: Bitcoin prices quadrupled last year as the U.S. Federal Reserve pumped trillions of freshly printed dollars into financial markets, nearly doubling in one year the amount of money it had created over the prior 107 years. 

But bitcoin’s market reaction to faster-than-expected inflation also might reflect the topsy-turvy nature of financial markets, where the data points matter far less than what the Federal Reserve might do in response to them.

In this case, many economists say that the pace of inflation still appears to be “transitory,” as Fed Chairman Jerome Powell has put it.

“Fed officials are still telling everyone that `inflation is transitory,’ while they pour an unjustifiable $120 billion into the market each month,” Mati Greenspan, founder of the cryptocurrency analysis firm Quantum Economics, wrote Tuesday.

But there’s an increased chance that some of those higher prices might last longer and thus push the U.S. central bank to curtail its easy-money policies sooner than previously expected. That might help explain bitcoin’s weakness – if a “looser-for-longer” monetary policy starts to look less likely.

“A hot inflation report unnerved some investors as expectations grow that the Fed will have to acknowledge that higher inflation will stick around,” Edward Moya, senior market analyst for the brokerage Oanda, wrote in a daily note. “This inflation shock might not be a strong enough catalyst to break bitcoin’s recent trading range.”

Bitcoin is in its eighth week stuck in a range of between roughly $30,000 and $40,000, and the sideways trading is reflected in the anemic cryptocurrency trading volumes of late. 

The fast-moving gains witnessed earlier this year are nowhere to be seen at the moment. According to Alternative.me’s “Crypto Fear & Greed Index,” cryptocurrency markets are currently gripped by “extreme fear,” as noted Tuesday in a report by the Norwegian firm Arcane Research.   

Even so, plenty of buyers have proven ready to pounce whenever bitcoin dips into the $30,000 range. 

“Bitcoin’s consolidation range is getting tighter,” Arcane Research noted. According to the firm, the market is showing healthy signs, with future prices trading at a premium to the spot market. “A more aligned futures market is overall a healthy sign,” the firm said.

The largest cryptocurrency’s price volatility has declined recently, and a look at the historical chart (below) shows just how lackadaisical the market got during last year’s summer months in the Northern Hemisphere. 

Ironically given bitcoin’s reputation as an extremely risky financial asset, the largest cryptocurrency might be considered the safest play for now, with some analysts declaring digital assets to be in a bear market.

Over the past seven days, bitcoin is down 4.3%, while ether, the native cryptocurrency of the Ethereum blockchain, has lost 14%. 

“In a downward trending crypto market, bitcoin is the safest bet,” Arcane Research wrote. “This has led bitcoin’s market dominance to increase.” 

“Market dominance” represents bitcoin’s market capitalization as a percentage of all cryptocurrency markets. The gauge started off 2021 at around 70% but fell to about 40% as bitcoin’s price retreated and alternative cryptocurrencies, or “altcoins,” rallied. Lately, it’s rebounded to about 45%. 

CoinDesk Research’s just-published second-quarter review includes a chart comparing the returns from staking ether in Ethereum 2.0 with the returns available from depositing ether into decentralized lending apps like Compound, dYdX and Fulcrum. 

“The rates on Eth 2.0 are significantly more attractive,” with an annualized rate of 6.72% versus “at most 2%” from the decentralized finance (DeFi) protocols, the report concluded. 

The drawback is that “staking on Eth 2.0 does not offer users liquidity on their ether and requires a minimum of 32 ETH, worth $72,832 at the close of the quarter,” according to the report. “Over the long term, as transfers are enabled on Eth 2.0 and a greater number of users trust the protocol with their ether holdings, the return for running a validator is expected to decrease and increasingly take on the role of a risk-free interest rate on Ethereum. 

The U.S. consumer price index jumped by 5.4% in the 12 months through June, exceeding the 4.9% increase expected by economists.

Core CPI, which excludes food and energy prices, rose 4.5% year over year, also higher than economists’ expectations of a 4% increase. On a month-to-month basis, consumer prices rose 0.9%, higher than the expected 0.5%, and accelerating from May’s 0.6% pace. Excluding food and energy, the index also rose 0.9% from the previous month.

The CPI report, released Tuesday, shows an economy that’s working through supply constraints while trying to meet increasing demand as the country reopens, with business lockdowns ending and coronavirus vaccines reaching more people.

“Many of the same indexes continued to increase, including used cars and trucks, new vehicles, airline fares and apparel,” the Labor Department wrote. 

The CPI report is particularly important for some cryptocurrency investors who view bitcoin as a hedge against inflation and currency debasement.

According to Eqonex: “A break below $32,000 will allow the bears to push for a return to support at $29,800, with $28,700 being the key level the bulls must protect. On the upside, the bulls will need to close the market above $33,600 to prevent further downside price action. Above $33,600, we look for $34,600 to limit gains as the market continues to trade is a tight sideways pattern.”

Most digital assets on the CoinDesk 20 ended up lower on Tuesday.

Notable winners as of 21:00 UTC (4:00 p.m. ET):

algorand (ALGO (-2.25%)) +2.71%

tezos (XTZ (-7.47%)) +0.33%

USD Coin (USDC) +0.03%

Notable losers: 

eos (EOS (-8.14%)) -7.49%

Aave (AAVE (-9.45%)) -7.09%

uniswap (UNI) -5.73%