Will Inflation Hurt Bitcoin? The Current Narratives About BTC (And How They Hold Up)

So... What do we make of all this? As I've noted before, our Crypto Investor Network analysts conclude that "BTC is working through a bottoming process right now and that the worst of the sell-off is over for cryptos," based on "recent price action trends, current valuation metrics, and the evolving tech stock rebound."

We also expect BTC to consolidate for the next few months before its next boom. How long, of course, depends on when people can feel confident the worst is past and tiptoe back into crypto markets (and stocks, for that matter). There's still been good news for all sorts of crypto projects - but right now, bitcoin and friends just aren't responding much.

There are a few narratives going around, as people try to make out what's in the cards for crypto. Let's see how helpful they are in deciding how to proceed as investors.

Will Inflation Continue the Chaos for Bitcoin?

"Inflation Reaches 40-Year High: How Will This Affect Bitcoin Prices?" asked Forbes yesterday morning.

"Red-Hot Inflation Data Have Knocked Cryptos Lower," answered Barron's. It's been on people's minds for weeks; Cointelegraph warned us on Monday that "U.S. inflation data will be €˜messy'" for bitcoin when June’s consumer-price index report published Wednesday morning.

Well, I'd guess that inflation isn't going to magically go away here in July, either. Even if prices stop, well, inflating...they're already so elevated that it'll take time to work through all the effects on economies worldwide.

But the impact of inflation on BTC depends on which group of investors is driving the bus:

Ordinary people are going to personally feel the greatest pain each day; I can see them simply waiting things out until they've got the extra coins, so to speak, for crypto trades. Wall Street institutions, on the other hand, are more likely to have specific economic reports on their radar - and react sharply to each one.

Well, here's a clue from the blockchain analysts at Glassnode, in their Week On-Chain report: "Small Entities" in BTC "remain quite active relative to past bears" - BUT "the activity of large entities (likely institutions) has been dramatically higher than retail, both through the bull cycle and more recently during the capitulation events."

So, I think the mainstream-media narrative about inflation being "messy" for bitcoin holds up. With institutional investors having the biggest price impact, BTC and friends may see more knee-jerk reactions to economic reports, stock-market style.

Crypto markets didn't love the Federal Reserve's response to inflation, either: interest-rate hikes. "And analysts anticipate an equal or greater hike later this month" than the +0.75% we saw in June, as Blockworks notes.

Today, we got the Producer Price Index (PPI) for June, which also came in surprisingly high... But as I write, we're not seeing a price impact. As Blockworks further explains: "The Fed's preferred measure of inflation is the core personal consumption expenditures price index, the PCE, which will be released on July 29."

So, keep an eye out for another knee-jerk reaction to that report in two weeks. Hopefully it will be as short-lived as yesterday's Consumer Price Index (CPI) response was. In the meantime, this is certainly another interesting narrative:

Will the Saudis Swoop In to Save Bitcoin?

This one is more of a Twitter meme... But sometimes, those aren't so easily dismissed - just ask Elon Musk and Dogecoin (DOGE-USD). I'd argue his Twitter account is equally responsible for Tesla (NASDAQ:TSLA) performance, too.

Well, at any rate, we have some new data to put this one to the test. But it all started with Twitter rumors that "Saudi Arabian investors are ready to bid billions on the top cryptocurrency," as Blockworks explains it: "Such a move would diversify the Kingdom's reserves away from oil into €˜digital gold,' securing its financial future in a world that hopes to one day shed its fossil fuel dependency - or so goes the theory."

The "Saudi meme" has spread on Twitter the past week or so: Anytime BTC prices do anything, people joke that the Saudis are bidding it up - or, wait, maybe they changed their mind! Well, the global exchange KuCoin (KCS-USD) jumped into the discourse to tell us what actual Saudi investors think:

According to KuCoin's "Into the Cryptoverse: Saudi Arabia 2022" report Wednesday:

• 14% of Saudis own crypto or have over the past six months. This is probably a little lower than in the United States...
• Although another 17% of Saudis said they were likely to invest in the next six months.
• Saudi crypto sentiment "saw a reversal" in Q2: 31% said they would simply hold their crypto, rather than "increase investment" (as 49% of respondents had planned to in Q1).

So, it sounds like if Saudis were going to swoop in, buy a ton of bitcoin, and save the day, they probably already would have.

Is "Wash Trading" on Binance Manipulating BTC?

We looked at this on Monday, but let's revisit the theory and how it's holding up now:

For the past month, Binance (BNB-USD) has been testing out zero trading fees with 13 cryptocurrency pairs for its U.S. customers; all of the pairs involve bitcoin. On Friday, July 8, Binance expanded this zero-fee bitcoin trading worldwide.

Theoretically, this would create an incentive to buy a bunch of BTC just to sell it back (all for zero fees), simply to achieve enough volume to get Binance VIP privileges.

So, how many people are "wash trading" bitcoin - and what's the impact? The chart below shows the price and volume of BTC on Binance afterwards, through last night. Volume certainly spiked the morning of July 8... But the price didn't move more than about 2% in either direction for a good 48 hours:

And volume wasn't nearly as high for BTC on Binance until Wednesday morning - when BTC fell sharply everywhere as inflation came in surprisingly high in the Consumer Price Index for June.

The theory would be strong, except that Binance CEO Changpeng Zhao was extremely sensitive to it. Hours after Binance's new policy went into effect Friday, the exchange announced: "To ensure a fair trading environment for all users following the launch of Zero-Fee Bitcoin Trading, Binance will exclude the trading volume of the 13 Bitcoin (BTC) spot trading pairs from" VIP level qualifications, plus the Spot Liquidity Provider program.

Given the volume vs. price action we saw in my chart - I'd say macro news has a much bigger impact right now than anything at Binance.

But There Is Some "Inside Baseball" Worth Looking At

Blockchain journalist Ben Lilly charts large trades over time to determine their liquidation prices. And much of this liquidity doesn't come into play until BTC gets back to $25,000. That is, as long as it doesn't go to $18,000, where another large liquidity pool sits.

Lilly notes that "two significant pools were taken out to the upside" already on Friday, when BTC spiked to $22,000. "This is one of the first signs that price is beginning to behave a bit differently. And [it] suggests that a sweep to the $25k price area looks possible."

"The caveat here is that for price to threaten that level, no more skeletons can get exposed within the cryptocurrency market, otherwise more forced selling can be triggered," Lilly continues. "But chances are declining as many entities now move to legal proceedings." (And he wrote this even before Celsius Network (CEL-USD) finally ripped the band-aid off and filed for Chapter 11 bankruptcy yesterday.)

In other words... This narrative remains to be proven out, either way. I, for one, am hopeful that we can simply move more or less sideways for a while, in the absence of major bearish catalysts. BTC will just need to stay strong for at least another couple months of sky-high prices that trigger Federal Reserve action.

In the meantime, check out Charlie Shrem's free briefing on how to find the best cryptos to make the most of the next bitcoin boom. If you sign on with Charlie and Luke Lango today, you'll see which cryptos they've just deemed Strong Buys for their Crypto Investor Network.

On the date of publication, Ashley Cassell  did not have (either directly or indirectly) any positions in the securities mentioned in this article.  The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com  Publishing Guidelines. To have more news from The New Digital World sent to your inbox,  click here to sign up for the newsletter.