Market Wrap: Bitcoin Rallies Despite Cooler Inflation Data

The Labor Department reported Wednesday that ​​the consumer price index posted a 0.5% month-to-month gain, compared with a 0.9% increase in June. The price rose 5.4% from the year-ago level.

Despite cooler – but still high – inflation data in July and the U.S. Senate’s passage of a $1 trillion infrastructure bill that could impose certain taxes and restrictions on the cryptocurrency sector, bitcoin’s price climbed to $46,502 on Wednesday, its highest level since mid-May, with retail investors returning to the market. The cryptocurrency was trading at $46,433 as of press time, up 2.45% on the day.

“The market isn't expecting the language in the Senate bill to progress as is through the House and into law, which I also agree with,” Jeffery Wang, head of Americas at crypto services Amber Group, wrote to CoinDesk in an email. “I think once all is said and done, we will have more palatable rules for the crypto industry."

Latest prices

Cryptocurrencies:

• Bitcoin (BTC) $46,566, +2.1%
• Ether (ETH) $3255.7, +3.2%

Traditional markets:

• S&P 500: 4447.7, +0.25%
• Gold: $1752.4, +1.35%
• 10-year Treasury yield closed at 1.332%, compared with 1.347% on Tuesday

“Bitcoin has taken a major leg up in the last few weeks. In our past notes we had anticipated a rally till mid of August,” Pankaj Balani, CEO of Delta exchange, wrote in an email to CoinDesk.

“We believe that the market should take a breather here. We expect the price to consolidate for some time in the $40K-$45K range before taking decisive action toward the end of August, early September,” Balani wrote. “The volatility continues to trade rich and there is interest to write the upside beyond 50K for Aug and September.”

Meanwhile, the total cryptocurrency market cap has topped $2 trillion for the first time since May, according to CoinGecko.

Bitcoin traders might be more focused on inflation than crypto taxes

The U.S. Senate's passage of a $1 trillion infrastructure bill this week with measures considered onerous for the cryptocurrency industry has done little to halt bitcoin's nearly 60% price rally over the past few weeks.

Maybe that's because the latest moves by lawmakers in the world's largest economy illustrate how little appetite there is among top officials to curb the elevated spending that has fueled a run-up in U.S. government debt to unprecedented levels of over $28 trillion.

Crypto traders might be betting that the extra spending could spur inflation, potentially bolstering bitcoin's appeal as a bulwark against dollar debasement. The Federal Reserve has created trillions of dollars in the wake of the coronavirus pandemic to help absorb the additional U.S. Treasury borrowing; the central bank's holdings of Treasury bonds has increased by about $3 trillion since early 2020, to $5.3 trillion as of last week.

And despite speculation that the Fed might move to taper its bond purchases of $120 billion per month later this year (including $80 billion a month of U.S. Treasuries), the central bank may need to finance additional government borrowing. The Congressional Budget Office projected in July that budget deficits over the next decade could total $12 trillion, pushing the government's debt load, expressed as a percentage of gross domestic product, to 106%, by 2031. A decade ago, that ratio stood at just 63%.

The CBO has said that the bipartisan infrastructure bill could swell projected deficits over the next decade by an additional $256 billion. That's equivalent to another four months of Fed Treasury purchases at the current pace.

And there may be additional upward pressure on budget deficits after the Democratic-led Senate on Wednesday approved a $3.5 trillion budget framework with provisions for extra spending on family services, health and environment programs. According to the New York Times, the effort could "create the largest expansion of the federal safety net in nearly six decades."

Much of that has been in the works for a while. Last year, bitcoin's price quadrupled as then- presidential candidate Joe Biden defeated President Donald Trump in a Democratic government takeover billed as the "Blue wave." But there's a growing sense now that U.S. finances might be reaching a point of no return.

"You're putting in motion a government that nobody's grandchild can ever afford to pay," said U.S. Sen. Lindsey Graham, a South Carolina Republican, according to the New York Times.

Based on the recent years' trend, the Federal Reserve might end up paying for a lot of it by printing money.

Speaking of inflation…

The U.S. consumer price index jumped by 5.4% in the 12 months through July, the same pace as June and slightly exceeding the 5.3% increase expected by economists, the Labor Department reported Wednesday.

Despite the latest 12-month increase being on par with the fastest inflation in more than a decade, some analysts saw the stabilization as a sign that price pressures from the economy's reopening might be easing.

"While I don't think a small decline is a game changer, as far as monetary policy is concerned, it may have been had we continued to see an acceleration, or evidence of more worrying price pressures. Instead, we can all breathe a little easier," Craig Erlam, senior market analyst for the brokerage firm Oanda, wrote in an email.

The July CPI report isn't likely to have a major influence on the Federal Reserve's high-level discussions over when and how quickly to start tapering its unprecedented monetary stimulus. In last month’s Federal Market Open Committee (FOMC) press conference, Fed Chairman Jerome Powell noted that the central bank is aiming to make gains in its goal to reach maximum employment before tapering.

Many bitcoin traders closely track headline inflation numbers in the event that the digital asset becomes a hedge against inflation because of its limited supply cap at a time when the dollar might be losing some of its purchasing power.

Hacker giving money back?

An address associated with the hacker who drained Poly Network of potentially hundreds of millions of dollars on Tuesday has started to return the funds, CoinDesk's Eliza Gkritsi reports.

The transfers came after Poly Network first agitated for the blacklisting of the exploiter's wallet addresses and then set up multi-signature addresses to receive any returned funds.

One surprise is that the news of the exploit didn't rattle digital-asset markets too much.

"Reports late last night of a $600m hack have done nothing to shake sentiment in the cryptocurrency space, despite it being the largest hack in history," Oanda's Erlam wrote. "While a massive story, it seems traders aren't concerned, something that perhaps we wouldn't have seen a few years ago."

The blockchain research firm Chainalysis published its own analysis: "While we certainly don’t expect every cryptocurrency hack to end with the attacker returning the stolen funds, in this case, it appears Poly Network will get its money back and has also learned about an important vulnerability its team can now patch up. Ultimately, the ecosystem will be stronger for this," the report said.

Altcoin roundup

Cake Wallet Enables Readable Usernames: Unstoppable Domains, a blockchain domain provider, now allows Cake Wallet users to create custom user names for their wallet addresses. Launched in 2018 as the first free and open-source wallet for the privacy coin monero on IOS, Cake Wallet has expanded to include android applications and support for bitcoin, litecoin, ether and Cardano’s ADA. The wallet maintains some of the fundamental features of traditional wallets such as a built-in exchange and support for “fiat view.” Rather than use a 32-bit ambiguous string (on the visible layer at least), Cake Wallet’s 150,000 users will be able to create usernames under the "[NAME].crypto" format.

Ghana to Test CBDC With German Banknote Printer: The Bank of Ghana plans to test a central bank digital currency (CBDC) in partnership with German banknote printer Giesecke & Devrient. The central bank said Wednesday that Giesecke & Devrient will be providing the technology for the currency, the digital cedi. Munich-based Giesecke & Devrient provides banknote and securities printing services as well as cash-handling systems.

Relevant News:

• Neuberger Berman Greenlights Indirect Crypto Investments for Commodities Fund
• Coinbase Rakes In $1.9B in Transaction Revenue in Q2, Beating Estimates
• Changing Crypto Trading Patterns Reveal the Market’s Power Shift to the West

Other Markets

Most digital assets on CoinDesk 20 ended up higher on Wednesday. In fact everything was in the green except for dollar-linked stablecoins.

Notable winners of 21:00 UTC (4:00 p.m. ET):

xrp (XRP) +30.4%

polygon (MATIC) +21.9%

cardano (ADA) +17.6%