Better-than-expected US inflation should have lifted Bitcoin. Here’s what happen

The slowdown in US inflation data for October month was better-than-expected which shifted the gear in crypto markets for a brief moment. Everything looked rosy and optimistic, Bitcoin surged by around 4%, and Ethereum along with other cryptos too picked up on the day when inflation data was announced. But then came Friday, and the scenario changed drastically as cryptocurrencies are in a bloodbath currently. Bitcoin which is the largest crypto has erased its $17,000 mark. So far this year, past trends showed a correlation between Bitcoin's performance with US inflation data. The latest print of the US consumer price index should have led to an upside for Bitcoin, however, that is not the case. Why? The answer is the crypto exchange FTX.

On Thursday, the US announced its consumer price index inflation data for October month. US inflation has slowed down for the fourth month at 7.7% --- reaching the lowest level since January this year. The latest slowdown is even better than expected. Earlier, in June, the US consumer price index made its largest increase in 40 years during June month at 9.1%.

On the same day of inflation data, Bitcoin gained traction to the point the crypto even crossed the $18,000 mark.

According to Anurag Agrawal, Principal, Investment Strategy at Kunji, in the past, when inflation was very high, a higher CPI from one month to the next caused the crypto markets to crash.

As per Kunji's data, when inflation increased to more than a 40-year high in June at 9.1% --- which was larger than expected --- Bitcoin performed higher. The same was the case in July month --- when inflation came to 8.5% slowing down more than expected --- Bitcoin gained. A similar pattern was seen in Bitcoin when inflation came in lower than expected in October. Data shows that in October inflation was expected around 8%, while it came to around 7.7% -- which was a much better slowdown of 30 basis points from street's estimates.

Kunji expert explains that lately, the markets across the board have shown bullish movement whenever the actual rate has been lesser or equal to expectation and vice versa. While equities(S&P), Energy(SPN), and BTC showed a good correlation, GOLD persistently showed deviation from the group trend.

He said, "The CPI report for the last two months was higher than expected. This caused a sell-off in BTC, which caused BTC to drop by 10% on the day of the September report, along with the S&P 500 and Nasdaq, as the market prepared for a hawkish FOMC report."

Adding, Agarwal highlighted that Bitcoin went down to a low of $18,300 in October, but after the CPI came out, it went up by almost 4%. Since the CPI was higher than expected, this was strange. He said, "This shows the relative decoupling and slight bullish trend for the crypto industry as BTC is now performing differently on substantially more number of major events than last year."

On Friday, on CoinMarketCap, Bitcoin slipped to a low of $16,543.48 in 24 hours. Currently, it traded below $16,800 and lower by around 5%. Ether as well slipped by 4% and is below $1,260. Binance's native token BNB shed over 6.5% and is struggling near $285. Counterparts like XRP dipped by over 3%, Cardano shed nearly 6% and Dogecoin tumbled nearly 7% in 24 hours.

Due to the current sharp selloff, Bitcoin's weekly drop is around 19%, Ether has fallen by more than 22%, and BNB slumped nearly 19%.

On CoinMarketCap, the global crypto market is traded at $850.33 billion down by nearly 5%.

The reason behind the hysteria in crypto markets is crypto exchange FTX who has announced bankruptcy.

Anurag said, "With the US midterm elections being positive for broad markets except for crypto, the CPI number coming in at 7.7% well under the expected 8.0% gave a bit of relief to markets across the board on the evening of 10th November. While the gain in BTC, ETH, and crypto seems larger than the equities, it’s just a very short-term thing. The actual aftermath of the crypto contagion caused by FTX’s insolvency is yet to be calculated."

FTX released a statement on its Twitter handler. It said that FTX Trading, West Realm Shires Services (FTX US), Alameda Research, and approximately 130 additional affiliated companies (together the FTX Group) have commenced voluntary proceedings under chapter 11 of the United States Bankruptcy Code in the District of Delaware in order to begin an orderly process to review and monetize assets for the benefits of all global stakeholders."

Not just that, Sam Bankman-Fried has resigned from his post as CEO at FTX Group. John Ray III has been appointed in his place as the CEO.

Further, in the statement, FTX said that "many employees of the FTX Group in various countries are expected to continue with the FTX Group and assist Ray and independent professionals in operations during the Chapter II proceedings."

Subsidiaries of FTX Group that are not included in Chapter 11 proceedings are --- Ledger LLC, FTX Digital Markets, FTX Australia, and FTX Express Pay.

It feels like deja vu. The crypto markets are not seeing a situation like FTX for the first time. Just like FTX, leading crypto exchanges Celsius and Voyager Digital are under an insolvency process.

FTX's sister token FTT has nosedived by around 50% at its worst in a single day --- which is enough to remind the flash-crash of Terra sister tokens USD and LUNA that took place in May this year.

FTX crisis is likely to put impact investors' trust in cryptocurrencies. Billions of dollars of wealth have come under pressure in this market.

At present, FTX-backed token FTT traded around $2.7 -- nosediving by over 23.5%. Millions of dollars of the market cap of FTT have been wiped and are currently near $363.58 million. Its weekly drop on CoinMarketCap is more than 89%, while its monthly downfall is over 88%.

In Aggarwal's view, being one of the most widely connected firms across the Trading ecosystem, private crypto equity, sports arenas, and whatnot, FTX’s plunge will surely create havoc for crypto markets in the coming months.

"Even though a final leg up is hugely probable for the broad markets, structural changes in the crypto ecosystem and much stricter regulations should be expected after this episode," he added.

Founded in 2019, FTX is headquartered in The Bahamas. As of February 2022, the exchange had over 1 million users.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.