The cryptocurrency market experienced a sharp decline in just 12 hours, wiping out around $200 billion in market value due to a sudden change in inflation expectations, turning the scene from optimism to panic.
From optimism to panic
At the beginning of the week, the Consumer Price Index (CPI) report came in with lower-than-expected figures (2.7% year-over-year), which boosted investor sentiment and led them to believe that the Federal Reserve was nearing a rate cut. This optimism reflected in the inflow of funds towards Bitcoin, Ethereum, and other altcoins.
But the scene changed quickly with the release of the Producer Price Index (PPI) report, which showed prices rising by 0.9% month-over-month, a reading much higher than expectations. This 'hot' result suggested that inflationary pressures remain strong, dispelling hopes for a quick rate cut.
Direct impact on the market
Surprising inflation data caused a spike in U.S. bond yields and a strong dollar, both historically negative factors for cryptocurrency performance. Within minutes, traders began intensive selling of their positions, triggering a wave of forced liquidations of over a billion dollars from leveraged long positions, accelerating the downturn.
ETF funds increase pressure
The situation worsened with outflows from some Bitcoin and Ethereum exchange-traded funds, after seeing positive inflows earlier in the week. These redemptions drained liquidity from the market and accelerated the price decline.
Major economic shock
This decline was not the result of issues within the crypto market, but rather a macroeconomic shock. Inflation data reshaped investor expectations instantly, as the odds of a rate cut in September dropped from near certainty to below 91%. The result: a broad sell-off in high-risk assets, with cryptocurrencies being the most affected.
The key lesson from these events is that the cryptocurrency market is not isolated from the macro economy; a single inflation report can flip the equation and wipe out hundreds of billions in value before most traders can react.
