Why crypto traders should not over analyze inflation data? In the crypto space, just like any other sector, it is a common trend followed by the crypto traders to scour and scuttle through a large number of data sheets and charts to analyze the price movements in the market in inflationary situations.
This is primarily done with an objective to find a suitable and explainable angle to the intra-day price actions that is so common in the crypto market.
They will continuously look for newer and fresher economic numbers that are published on a regular basis for the same.
There is no doubt that this is a very good practice because it helps the crypto traders to plan their next moves accurately and more productively to beat the harmful effects of inflation.
However, the bad thing about this practice is that the crypto traders sometimes seem to over analyze the data available and more often than not end up mixing things up.
Ideally, overanalyzing inflationary market d economic data may not help much in making a trading decision, not only in crypto but in all other investment sectors as well, as suggested by the experts, who have a lot of good reasons to say so.
If you do not know the reason, you are in the right place.
This article will let you know how exactly it may have an adverse effect in planning your crypto trading strategies and price speculations.
You may also need to consider going through other things that you may feel are useful and more effective to create a productive crypto trading strategy to outpace inflation.
This includes price surge, community reactions, decisions of the Federal Reserve and a whole lot of other things.
You should not over analyze any such reports and charts as well.
Why Crypto Traders Should Not Over Analyze Inflation Data?
You will come across a lot of charts, data, and reports as mentioned in this article that may help you to plan your next moves while trading crypto especially in an inflationary market
However, just like the economic inflation data, these reports and charts may also portray something but the actual data may tell something entirely different.
That is why overanalyzing any and every available chart and graph is not recommended for any crypto trader wanting to beat the effects of inflation.
Ideally, authorities such as the United States Bureau of Labor Statistics publish reports on the increase in the Consumer Price Index or CPI from time to time.
People usually rush to it to find whether or not there is any connection of it with the price actions of crypto, which often turns out to be futile.
Therefore, it is more necessary for the crypto traders to find out whether or not there is any historical correlation data available that they can scrutinize closely to find the relation between crypto and the most important economic indicators, if at all, during inflation.
If you follow the general investment advice of the experts, you as a crypto trader should typically ignore the intra-day price movements in the market.
No matter how peculiar it may sound to you, this is a good approach especially when it is given that most of the crypto assets available in the market are not traded on a day to day basis.
Therefore, it is more important that you understand the order books, price indices, and average trading volumes of a crypto coin and a crypto exchange as well for that matter to have a much better understanding of the price movements and other related things.
This is very important because you will find that more often than not the order book depth of Bitcoin seems to be insipid when it is compared to that of gold, S & P or Standard and Poor’s 500 futures, and WTI or West Texas Intermediate futures.
This is even more prominent in the inflationary market conditions.
To put it in simple terms, if you normally consider a larger order flow even of a single entity, it has a high chance of misrepresenting the crypto market especially in the short term, which is your primary focus as a crypto trader.
On the other hand, if you minimize the number of data as well as your analysis you will even be able to identify the smaller impacts of inflation on the market most easily.
When you consider these things you will see that one may aggregate stablecoin trading, the seven-day trading volume of Bitcoin may be less than $10 billion in the other and the three largest S & P 500 ETFs or Exchange Traded Funds may collectively worth more than five times that amount in another.
Typically, a larger number of charts and longer data sheets has a high chance to distort the eventual outcome of your price analysis because it will minimize, if not eliminate, the chances of overanalyzing the data.
All these will make things more confusing to understand the effects of inflation on the market.
That is why you should restrict your price analysis efforts to a few specific data and price charts as mentioned above.
This will not only curb down the time you spend on your analysis but will also ensure that you come out with the most precise results that will help you to make the right decisions eventually and protect your trades from being affected due to the inflation.
Price speculation or anticipation is the basic aspect of crypto trading and the crypto traders usually tend to look at the Bitcoin prices for that matter.
This is because the price movements of almost all other crypto coins tend to have some relation with that of Bitcoin some way or the other.
However, the question is whether or not the price of Bitcoin itself can anticipate the inflation data.
In fact, the price of Bitcoin dipped significantly when the Consumer Price Index experienced an increase by about 8% last year.
This encouraged the media as well as the financial experts to find a correlation between the two events.
According to the published statement, the market conditions were assessed precisely to find out the effects of inflation in the prices of crypto assets.
However, the problem is that the time frame considered for making such an assessment seems to be pretty short to keep up with the scheduled date of publishing the report.
Longer the time means that a larger amount of economic data will be available for assessment which will produce more accurate analytical results.
Moreover, especially in a shorter time frame there is a high possibility that Bitcoin may not show any relevant correlation in price with inflation but that can be latent and could have been exposed if a longer time scale was considered.
Ideally, this is the most important hypothesis that needs to be tested to find the most appropriate analytical results.
Therefore, a more comparative analysis considering a long term chart between inflation and Bitcoin price in the US will not offer any improper idea of correlation and causation.
This is especially necessary when you are considering using logarithmic charts.
However, according to a report of 2021, it showed that Bitcoin could anticipate the economic inflation data by nearly three months when it stagnated just less than 1.5% in May 2021.
After this time, the price of Bitcoin seemed to have cooled off and did not rise enough to cross the $60,000 support when there was a sharp rise in the CPI which stopped at 5.4% after two months in July 2021 on the other hand.
Here is the mathematical aspect behind it, if you are interested in it.
The analysis shows that the coefficient of correlation between the price of Bitcoin and US inflation moved back and forth between 0.95 on the positive side and 0.94 on the negative side of the scale for a period of the past 12 months.
Therefore, statistically speaking, it makes very little or no sense at all to associate one with the other and will often prove to be a wrong approach resulting in a trading disaster.
Now, if you do not consider the price of Bitcoin individually, you may wonder whether or not the traditional crypto markets show any real correlation with Bitcoin during inflation.
Well, to know that you must first know that most people make the common mistake of characterizing the correlation of Bitcoin based on the performance of other assets over and above crypto.
This should be avoided because the actual data may show something that is entirely different.
Therefore, there is no reason to believe entirely on the data of the performance charts of other assets that may even show some correlation up to a certain degree either on the positive or negative side for a couple of consecutive months in a period of one year.
More often than not, such type of data is considered cherry-picking data simply because there is no such evidence seen when charts of a more extended time scale are considered.
This fact is substantiated by the fact that no specific relation in price was found between Bitcoin and other key assets such as the iShares TIPS Bond ETF and the WTI oil price which are known to track an index that comprises inflation-protected US Treasury bonds.
Therefore, after every economic data is published, there may be a varied set of data points that would show a completely different result.
That is why the crypto traders and investors should ignore the intraday price actions after such releases are made so that they do not act or react based on the inaccurate causation or correlation.
It is true that short term prices of crypto and other investable assets are affected by inflation and other related data but this may not necessarily indicate that the same impact is caused by the current trend in the market.
Therefore, once again, the correlation chart against the conventional crypto markets leaves little or no doubt that Bitcoin is a specific digital asset class of its own.
It is quite natural that inflation would create a commotion within the Bitcoin community and sometimes their reactions may help you in making the right decisions.
However, just as it can be beneficial, it can also create a lot of confusion if you do not analyze them properly.
Once again, you should analyze but not over analyze them to make things even more complicated.
People within the Bitcoin and crypto space tend to share lots of quotes and jokes as inflation data drops but hardly all of these will be necessary to you for designing your crypto trading plans.
A few people will share their excitement regarding the situation which will eventually raise the Bitcoin banner.
Now, these may have an adverse effect in your strategy creation if you do not understand the things clearly.
Therefore, do not consider everything in the series of reactions shown by the people within the crypto community to be useful.
As you may know that even in normal conditions, people in the crypto community tend to create FUD or Fear, Uncertainty and Doubt among others for their own benefit, and this can be even more extensive during such sensitive situations.
If you feel that any comment or advice is pushing you towards Bitcoin or any particular crypto coin for that matter, it should raise the red flag immediately.
Remember, there may be a lot of people out there who have successfully championed Bitcoin as a successful hedge against inflation of US dollar but could prove very little of what was said.
Instead, look for comments and suggestions that are useful and are meaningful.
These comments would have something worthy to mention in relation to inflation and Bitcoin and also substantiate it with links to sites where you can find more information, stats and figures.
For example, if you find a comment based on the Consumer Price Index, consider it to be useful because this is one useful indicator of inflation which is used most commonly.
Taking a closer look at it and researching further you may even find that the current dollar value may reduce to half of it in the following years if the inflation rate remains the same.
In such a situation, you will be better off if you follow the tweets and comments of successful Bitcoin investors and influencers.
You will find a lot of names on the internet such as Anthony Pompliano, Changpeng Zhao and others who will have meaningful things to share about crypto and inflation.
Remember, simply the fact that Bitcoin has a finite supply of 21 million does not necessarily mean it is a good hedge against inflation.
There are loads of other aspects to consider as well for making the right decision.
Bad as Expected
Most of the time crypto, including Bitcoin and Ether, rallies pretty badly on inflation data. And, this is not unexpected.
If you consider the data of the past 12 months you will see that the prices have increased by nearly 7% which shows that the inflation is not going to ease pretty soon.
Though Bitcoin and Ether witnessed some gains, the CPI data revealed that inflation is also rising at the same pace as it is expected.
This resulted in Bitcoin experiencing losses for quite a long time.
However, the fact cannot be ignored that the crypto market reacts quite differently from the traditional stock markets.
In fact, it is not surprising that people often think it to be reacting favorably in the inflationary situation.
The primary reason for such difference in behavior is that the crypto markets are open 24/7 and are highly liquid.
Moreover, the crypto assets are not subject to money policies implemented by the central banks.
All these facts make people believe that it has a higher potential to act as a hedge against inflation.
However, the ongoing pandemic for a longer time than expected created labor shortages that challenged the supply chains.
These factors however started to affect the market and therefore the high prices could not stay for a prolonged period and started to fall later in the session as the S & P 500 and NASDAQ Composite Index did.
If you follow the CPI data very closely over the years you will see that when the inflation data is high, prices of Bitcoin especially reached an all time high and that too sometimes at a rate that is supposed to be the fastest in the past thirty years.
Whether it is the intraday prices of Bitcoin or otherwise, it showed significant gain in price as soon as the CPI data was released in comparison to its price prior to that.
However, as always, inflation will be an issue in spite of the fact that Bitcoin is as scarce as gold having a finite supply of 21 million coins only out of which 80% have already been minted.
This is in spite of the fact that the coins cannot be devalued by any external authority or government institution due to its limited supply and decentralized nature.
As the measure of the nationwide inflation increased year after year, Bitcoin however did not react to such inflations with an increase in its price always.
For example, in July last year the price of Bitcoin fell dramatically after the CPI data showed high inflation reading.
Therefore, believing that Bitcoin is an effective inflation hedge can prove wrong often at times.
Even though the narrative may stick to it, things can turn really worse before getting better, which no one, as of now, can tell when.
Just as Bitcoin, other crypto coins were also bouncing on the price charts and a few even crashed by more than 20% of their original value.
Moreover, the correlation of Bitcoin price with inflation may not be what it seems to portray which makes it all the more risky to invest in Bitcoin.
Add to that, Bitcoin has not been in existence for long enough as compared to other assets that are worthy considering as an inflation hedge such as gold, which too has had a tenuous relationship over the years with inflation.
In fact, this particular digital asset behaves quite wildly making it too much of a speculative asset that is prone to crashes periodically.
Therefore, if you consider gold to be a good inflation hedge, there is no reason to believe that Bitcoin is the ‘digital gold’ because there is no strong evidence to back that up.
However, in a longer time scale, gold has proved to be more able to hold its value during inflation when the fiat currencies declined.
Bitcoin, in particular, could also prove to be able to do the same but surely not in the short term.
Decisions of Federal Reserve
The decisions of the Federal Reserve also play a significant role in determining the relation between Bitcoin and inflation.
In fact, most of the Bitcoin traders keep a track of it because the response of the Federal Reserve to inflation is quite expected and are typically based on the economic conditions which often influence the price movements in the market.
Not only the price of Bitcoin was down but the prices of used cars, food, and energy were all affected by inflation.
And, in the labor market it hit really hot coupled with the pandemic situation created by the coronavirus and the lockdown.
Given such a situation, the Federal Reserve is expected to be even more aggressive in their approach as believed by several financial analysts.
They expect that the interest rates will be raised than it was forecasted previously.
Such an indication has already been given by the Fed in the meeting with the FOMC or the Federal Open Market Committee in spite of the fact that it had kept the rate of interest near to zero.
With such an indication, the crypto market experienced a sharp drawdown despite its previous all-time highs.
However, the good news is that the crypto market has started to recover from the effects of inflation.
This, the experts believe is the result of the strong supervision of the Federal Reserve as the rate of inflation picked up.
Therefore, inflation as such continues to have little influence in the price of Bitcoin especially in comparison to other speculative factors.
Still, it has not yet been proved that Bitcoin can be a reliable and effective inflation hedge and is still largely theoretical though the latest price movements are in part the results of the economic factors after inflation.
This creates a situation where the Federal Reserve may bring in a hike in the interest rates though it may not be as severe as a seven or eight rate hike but anything to the tune of three to four is highly likely.
The decision of the Federal Reserve as well as the overall conditions of the equity market both will determine the price of Bitcoin.
Most of the financial experts put their odds on one of the two: 80% to the upside chances and 20% to its downward fall.
But then, once again do not leave anything to chance and overanalyze things if you want to design the most effective and productive crypto trading strategy.
Though most people believe in the price charts and data to find a relation between the behavior of Bitcoin and inflation to make their trading decisions, these should never be overanalyzed.
More often than not, you may end up making a wrong decision.