According to 10x Research: The crypto market is buzzing as Bitcoin and Ethereum rally ahead of this week’s crucial U.S. Consumer Price Index (CPI) data release. Traders are eyeing the potential impacts of inflation on these assets, with short-covering fueling the recent uptick. Here’s a breakdown of the key developments driving the market.
Ethereum/Bitcoin Ratio Sees a Rebound: Since the Ethereum Merge on September 15, 2022, the Ethereum/Bitcoin ratio has plummeted by 37%, facing consistent resistance at the upper boundary of its descending channel. However, in anticipation of the upcoming U.S. CPI data, we’re seeing a rebound in the ratio, likely driven by traders covering their short positions.
Ethereum’s Push for Scalability and Efficiency: Ethereum developers are hard at work advancing scaling solutions, particularly rollups designed to aggregate transactions and boost network efficiency to a target of 100,000 transactions per second. Significant efforts are also being made to enhance user experience and network efficiency through innovations like account abstraction, which introduces smart contract wallets, and single-slot finality, which promises to dramatically accelerate block finalization.
Macroeconomic Factors Dominate Ethereum’s Value: Despite numerous upgrades, including the Merge and Dencun, Ethereum’s price continues to be influenced primarily by macroeconomic factors like inflation. The network’s technical advancements have yet to significantly impact ETH’s value.
Inflation's Influence on Bitcoin: Bitcoin’s price remains closely tied to inflation trends, though this influence may wane as market attention shifts from whether the Federal Reserve will cut rates to how significant those cuts will be. Historically, inflation has dictated Bitcoin’s movements in nine out of the last ten CPI reports. Last month’s CPI release coincided with Trump’s assassination attempt, pushing Bitcoin higher as lower inflation typically leads to higher prices.
Potential for a Bitcoin Rally with Falling Inflation: Bitcoin has historically rallied when inflation drops and declined when it rises. However, during the June CPI release, Bitcoin did not rally despite a slight decrease in inflation. With inflation likely to fall below 3.0% soon, a Bitcoin rally this week seems probable, though the gains may be modest. In April, when inflation hit 3.5%, Bitcoin reached $70,500 but has since retreated, even as inflation dropped sharply.
Stubborn Inflation and Rate Cuts: Our inflation model suggests that inflation may remain stubbornly high, likely hovering in the 2.5% to 3.0% range for several months. If this projection holds true, it could decrease the likelihood of the Federal Reserve cutting interest rates aggressively, which may have implications for Bitcoin and Ethereum’s future price movements.
Short-Covering Rally in Bitcoin and Ethereum: As inflation is expected to drop, short-covering in both Bitcoin and Ethereum is driving the current rally. Ethereum, however, remains the largest underperformer since the September 2022 Merge, with its fundamentals still weak—revenues are depressed, and active user numbers continue to decline.
Ethereum’s Shift to Inflationary Status: Contrary to earlier expectations, Ethereum has turned inflationary since April this year, with more ETH being issued than burned. Despite its growing use in staking, Ethereum remains in a bear market, showing no clear signs of outperforming Bitcoin shortly.
Concerns About Ethereum ETFs: Two months ago, before the launch of the Ether ETF, there were concerns that market expectations were overly optimistic. Inflows have indeed fallen short, primarily due to limited marketing efforts on Wall Street and the absence of a clear narrative around how Ethereum would fit into institutional portfolios. While Bitcoin Spot ETFs saw $1.4 billion in net inflows within 15 days of their launch, Ethereum Spot ETFs have experienced net outflows totalling $400 million.
Ethereum Faces Resistance in Short-Covering Rally: Ethereum recently experienced a sharp 30% decline in just three days. The 2,900/3,000 zone, which provided support earlier in the year, now risks becoming a resistance level in this ongoing short-covering rally.
Analysts Weigh in on Ethereum’s Volatility: Some analysts have noted that higher implied volatility for Ethereum—70% for ETH compared to 55% for BTC—suggests that savvy traders might be more bullish on ETH than BTC. However, this implied volatility aligns closely with realized volatility, and the vol premium is justified.
Wall Street’s Caution with Ethereum: Since the Ethereum Merge, ETH has consistently exhibited higher downside volatility. Without the potential for outsized returns, these factors may discourage Wall Street from fully committing to Ethereum. As such, traders should enjoy this short-covering rally while it lasts.
