Inflation Hits Four-Decade High Of 7%; How Will Crypto Respond?

This morning at 8:30am eastern it was announced that the US Consumer Price Index had reached ‘7%’ Year over Year and 5.5% YoY excluding food and energy. However there are a lot of analysts and economists thinking this year with Fed rate hikes that they should hopefully slow down this high number.

*US Dec Consumer Prices +0.5%; Consensus +0.4%

*US Dec CPI Ex-Food & Energy +0.6%; Consensus +0.5%

*US Dec Consumer Prices Increase 7% From Year Earlier; Core CPI Up 5.5% Over Year

*US Dec CPI Energy Prices -0.4%; Food Prices +0.5%

Let’s dive into some on-chain metrics to better understand what’s happening right now in crypto. 

At the moment of this analysis, the sentiment indicator Fear&Greed Index is printing Extreme Fear (22). The indicator is at its lowest point since July 2021.

The Index tracking general sentiment on the leading digital asset has been reaching new lows after BTC lost a significant proportion of its value. Historically, “Extreme Fear” has indicated oversold territories, which also signals a potential buying opportunity ahead.

“Extreme Fear” on the sentiment indicator has only visited those levels in 4 instances in the last market cycle. Those fear levels are comparable to 4 oversold price levels: 3000, $4000, $10000, $30000. After those 3 scenarios, BTC rallied 340%, 17%, 1585%, 141% respectively. As those “extreme fear” levels are met again, traders are momentum to change in the next few weeks.

In terms of Net Positions of CME Bitcoin Futures by trader category, hedge fund activity seems to differ from the rest. Hedge-fund activity shows that they are still mainly net-short. Hedge funds tend to act as the smart money markets, being short at the tops and short and less short at market bottoms.

Open Interest is one of the main charts seen by traders at this moment. Open Interest is defined as the amount of open long and short positions placed on BTC derivative instruments.

In terms of open interests for BTC derivatives, there has been a clear divergence. Whilst crypto prices have plunged, open interest has increased substantially. On-chain data suggests the market could experience a short squeeze, as open interests keep trending higher even when the majority of speculators are betting against Bitcoin.