CPI at 0.4% broke Bitcoin’s US$73,000 floor. What happens if the Fed goes bigger?

On October 3rd, Bitcoin dipped below the $73,000 mark and reached a three-month low following a higher-than-expected US CPI report. The headline CPI increased by 0.4% month-over-month, surpassing the anticipated 0.3%, while core CPI rose by 0.3%, above the forecasted 0.2%. Bitcoin's value decreased by 1.89% to $73,601.89 within the past 24 hours, and the overall crypto market experienced a 2.14% decline during the same period.

This market-wide drop was primarily driven by inflation data, which heightened concerns about the Federal Reserve raising interest rates or maintaining them at elevated levels at their upcoming December meeting. Higher interest rates result in increased yields for cash and government bonds, making the opportunity cost of holding an asset with no cash flow, like Bitcoin, higher.

Bitcoin, being a speculative asset at the riskier end of the spectrum, is particularly sensitive to such shifts. Consequently, the inflation report not only acted as the initial trigger but also exposed pre-existing vulnerabilities within the market. Leveraged positions diminished rapidly, with over $1 billion in leveraged crypto positions liquidated within 24 hours, predominantly in long positions.

Institutional demand for Bitcoin had already waned, with US spot Bitcoin ETFs recording a record net outflow of $1.28 billion in a single week, including $201 million in outflows on November 9. Additionally, public companies contributed to the supply by selling around $869 million worth of Bitcoin, further exacerbating the downward pressure.

The tech sector also experienced a significant sell-off, with the Nasdaq 100 falling 6.4%, and Bitcoin's correlation with the S&P 500 and gold was 83% and 95%, respectively, reflecting a broader cross-asset repricing. The Fear and Greed Index was at 26, indicating a defensive sentiment rather than panic. While the CPI report played a pivotal role as the primary catalyst, the severity of Bitcoin's decline was amplified by the existing market weaknesses, including elevated leverage, negative ETF flows, and corporate treasuries reducing exposure.

The tech selloff and geopolitical news then turned a macro reassessment into a comprehensive risk-off cascade. In the short term, Bitcoin is near its 200-day simple moving average of $73,136, with a recent swing low around $72,689. A rebound could occur if Bitcoin surpasses $73,136 and reclaims the $74,000 to $75,000 range. However, a break below $72,689 heightens the risk of further downward momentum.

The current total crypto market cap stands at $2.45T, and a return to $2.52T would suggest easing of the selloff. The upcoming spot ETF flow reports will provide a tangible gauge of demand, and a bearish bias is observed as long as prices remain below $74,000 to $75,000.