The crypto market is down today, as market volatility increases ahead of the Consumer Price Index (CPI) report that measures inflation is set to be revealed on Feb. 14.
This week’s CPI print, combined with increased regulatory enforcement from the United States Securities and Exchange Commission (SEC) could translate to further downside for Bitcoin (BTC) and the wider crypto market which is currently flirting with 3-week lows.
U.S. expands crackdown against stablecoin issuers and staking as a service providers
The primary downside catalyst appears to be investors’ concerns over enforcement action against Paxos and Binance, plus the recent SEC crackdown on centralized staking. While some decentralized staking protocols may benefit from the recent enforcement action, the crypto regulatory environment is still unclear and uncertainty often leads to market volatility.
The cryptocurrency industry and regulators have a long history of not getting along either due to various misconceptions or mistrust over the actual use case of digital assets. The most recent battle is centered over how centralized exchanges (CEX) can use customer funds.
Gary Gensler, the SEC Chair issued the following warning,
“If this field has any chance of survival and success, it’s time-tested rules and laws to protect the investing public. Don’t have your hand in the customer’s pocket, using their funds for your own platform.”
The SEC started the recent string of enforcement actions by going after Kraken’s earn program on Feb. 9. In the $30 million settlement announcement, the SEC said it had charged Kraken with “failing to register the offer and sale of their crypto asset staking-as-a-service program,” which the commission claims qualified as a sale of securities. In addition to the monetary fine, Kraken agreed to cease earn program operations.
The enforcement action also led to Nexo also ending its centralized staking program. While some are arguing that the staking ban is another nail in crypto’s coffin, Coinbase CEO Brian Armstrong has vowed to fight the action if brought to court. Not all SEC commissioners agreed on the enforcement action against Kraken but the agency announced new crackdowns following this decision.
On Feb. 13, the SEC issued a notice to Paxos, a stablecoin issuer, claiming that BUSD is an unregistered security. Following the SEC announcement, on the same day, New York regulators ordered Paxos to stop issuing BUSD, which is the third-largest stablecoin in the crypto market.
Binance has stated they intend to continue supporting BUSD despite the order against Paxos. American lawyers believe the securities argument against BUSD is complicated due to potential profit from arbitrage, hedging and staking opportunities.
The lack of clarity on this matter weighs on growth and innovation within the sector, and many analysts believe that the mainstreaming of cryptocurrencies cannot happen until a more universally agreed upon set of laws is enacted.
While the Commodity Futures Trading Commission (CFTC) has called for clearer regulation, the pace of these changes is unknown. The Biden Administration released a roadmap for cryptocurrencies which suggests preventing pension funds from investing into high risk investments.
Crypto prices cool in the face of a potentially hot CPI report and strong macro headwinds
Crypto prices are still highly correlated with the Dow and S&P 500. In January crypto markets rallied after a better-than-expected CPI report, but lingering concerns about the health of the U.S. and global economy means the CPI print still has a direct impact on markets. If core inflation is up, further interest rate hikes are potentially ahead.
According to Nik Bhatia and Joe Consorti of The Bitcoin Layer, all eyes are on the CPI core number.
“The market will be most closely watching the monthly core number, previously 0.3% and expected to rise to 0.4%. Any deviation from these expectations is sure to move markets, and we know that with rates, equities, and Bitcoin all hanging around very important technical areas”
Adding to the tender sentiment surrounding CPI prints, most major banks still expect the U.S. to experience a sharp recession at some point in 2023.
According to Robert Haworth, Senior Vice President at U.S. Bank, investor sentiment remains low in the current economy:
“Consumer confidence remains low but is recovering to start 2023 from the record low in June 2022. The Michigan Consumer Sentiment Index, at 64.9, is well below average pre-pandemic levels, with consumers remaining concerned about inflation. Incomes continue to rise; personal incomes gained 5.8% on a 5% gain in wages in the fourth quarter and disposable personal income (less taxes) rose 6.5%. However, a rising savings rate during the quarter indicates consumers appear cautious.”
Traders book profits after Bitcoin’s stellar January performance
Bitcoin and the crypto market have witnessed a strong start to 2023, seeing 64% of BTC investors reach profitability as BTC price reached $24,000 on Jan. 29. Even struggling Bitcoin miners saw massive growth, with revenues rising by 50% to $23 million, signaling a recovery for the beleaguered industry.
While Bitcoin had the second-best January on record, the volatility caused by the SEC and macro markets may start a crypto price correction. With Bitcoin and Ether posting January gains of 43% and 32% respectively, some investors may begin locking in profits ahead of the U.S. tax season and before the CPI report.
Ray Salmond, the head of markets at Enic Magazine, provided insight into Bitcoin price in relation to the CPI:
“The price action seen in Bitcoin and the wider crypto market reflect traders’ anxiety over the SEC’s action against Binance and ahead of the CPI. In previous instances we’ve seen a bit of risk off maneuvering on the day of CPI. If the CPI report aligns with the expectations of market participants, we’ve seen an extension of the bullish momentum, but in this scenario, traders will look closely at core inflation numbers to gain insight on the potential future size of rate hikes. The recent spate of layoffs in big tech and spun down earnings estimates from brokerages and analysts also raise concerns about the health of the economy.”
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Top crypto investors believe more sell-offs are on the horizon and Bitcoin analysts push warnings of the long-term downtrend continuing. There is a CME futures “gap” below $20,000, and some traders expect BTC price to retrace to this level at some point in the future.
In the meantime, investors’ appetite for risk is likely to remain muted, and potential crypto traders might consider waiting for signs that U.S. inflation has peaked, or for the Fed to signal that smaller-sized interest rate hikes are on the cards. A more transparent roadmap for crypto industry regulation would also help to improve sentiment across the sector.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Enic Magazine.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.