Key Takeaways
- Bitcoin is back up to almost $70,000 after better-than-expected inflation data.
- Cooler inflation data is seen as positive for bitcoin, as market participants interpret it as a sign the Federal Reserve is more likely to cut interest rates.
- Lower rates will drag down bond yields, making risk assets such a bitcoin more attractive to investors.
- The U.S. spot bitcoin exchange-traded fund (ETF) market experienced a total of roughly $265 million in outflows on Monday and Tuesday when the cryptocurrency's price dipped.
Bitcoin's price (BTC) rose to nearly $70,000 Wednesday as investors cheered better-than-expected inflation data for May that raised hopes of a rate cut by the U.S. Federal Reserve.
U.S. Consumer Price Index (CPI) data released Wednesday morning showed that prices remained unchanged month-over-month and rose at an annual pace of 3.3%, slower than 12 months prior.
The Fed is set to announce a rate decision Wednesday. Although it's not expected to cut rates, the latest inflation report gives it more leeway to move on rates when it does decide to lower them.
Why Do Bitcoin Investors Care About Inflation or the Fed?
Bitcoin prices took a cue from Wednesday's inflation report, reversing their downtrend from Friday to come within striking distance of the $70,000 level. At 12:30 p.m. ET, bitcoin was trading at $69,359.30.
With inflation trending lower, the data-dependent Federal Reserve has more reason to consider lowering interest rates. The Fed's rate hike campaign to combat inflation has pushed rates to 23-year highs.
Why does that matter to bitcoin investors?
Although bitcoin is often touted as a safe haven asset of sorts, the reality is it still very much acts as a risk asset, as indicated by the price rise after cooler inflation numbers were released.
Bond yields also have surged amid higher rates, so that means bonds—a relatively less risky asset—also offer a good return, making them more attractive to investors. Lower interest rates that follow a Fed rate cut will likely drag down bond yields, potentially tempting investors to bet on risk assets like crypto in search of higher returns.
Will Bitcoin ETF Investors Reverse Course?
In the run-up to Wednesday's inflation data and subsequent Fed meeting, bitcoin investors were getting nervous. Not only did the cryptocurrency's price skid, spot bitcoin exchange-traded funds (ETFs) also experienced investors pulling out money.
According to data from Farside Investors, spot bitcoin ETFs posted roughly $265 million in outflows for the first two days of this week.
This was a clear trend reversal, as the spot bitcoin ETFs had recorded net inflows on each of the previous 20 days. That said, much of that previous inflow was due to an arbitrage opportunity that traders found between the ETFs and the futures market, according to BitMEX Research.
Ahead of the Fed's coming decision on interest rate policy later Wednesday, the CME FedWatch Tool indicated a 99.9% chance that rates will remain unchanged.
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