The cryptocurrency market experienced a sharp decline in just 12 hours, erasing nearly $200 billion from its market value, due to a sudden shift 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 numbers (2.7% year-over-year), which boosted investor sentiment and led them to believe that the Federal Reserve was nearing an interest rate cut. This optimism reflected in the flow of money towards Bitcoin, Ethereum, and other altcoins.
However, the scene changed rapidly 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 rapid interest rate cut.
Direct impact on the market
The surprising inflation data caused U.S. bond yields to rise and the dollar to strengthen, both historically negative factors for cryptocurrency performance. Within minutes, traders began to sell their positions aggressively, triggering a wave of forced liquidations of over a billion dollars in leveraged long positions, accelerating the downward trend.
ETF funds increase pressure
The situation worsened with the outflow of funds from some Bitcoin and Ethereum exchange-traded funds, after experiencing positive flows earlier in the week. These redemptions pulled liquidity from the market and accelerated the price decline.
Major economic shock
This decline was not due to problems within the crypto market, but rather a macroeconomic shock. Inflation data immediately reshaped investor expectations, as the chances of an interest 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 most prominent lesson from these events is that the cryptocurrency market is not isolated from macroeconomics; a single inflation report can flip the equation and wipe out hundreds of billions in value before most traders can react.
