What This Week's Inflation Data Means for Your Bitcoins

👇1-10) Traders expect a +/-6% move for Bitcoin by the end of this week. This is, of course, on the back of tonight’s PPI and, more importantly, tomorrow’s CPI US inflation data print. However, with implied volatility priced at 52.8% vs. 50.8% for other maturities, we can hardly say that a big move in BTC on the back of these inflation prints is priced in. Implied volatility is not expensive, as realized volatility traded slightly below 50%.

👇2-10) Technically, Bitcoin is still pressing onto the 60,800 to 61,400 support level. If this is broken, we would expect lower prices. The average entry price for Bitcoin ETF holdings is around 57,000, so any break below 60,000 will likely cause an adrenaline spike for those investors. It is no coincidence that BTC inflows slowed once Bitcoin failed to rally.

👇3-10) It is also no coincidence that stablecoin inflows slowed once the Bitcoin halving was out of the way, as many traders expect a consolidation period. The more exciting aspect is that Bitcoin sold off after each of the last two CPI/PPI data points were released. Hence, today’s note focuses on our Bitcoin expectations after those inflation prints.

👇4-10) Each sell-off was approximately 12-14% and was stopped by Fed Chair Powell being more dovish than the market expected. First, on March 20, he reiterated three rate cuts in 2024; second, on May 1, he announced less quantitative tightening and ruled out rate hikes. However, with the next FOMC meeting scheduled for June 12, Bitcoin will have almost a month to react to this week’s inflation data points.

👇5-10) Our inflation model has a 20-year track record and leads by two months. Still, there seems to be a structural residual since the COVID stimulus, as housing and services inflation (auto insurance?) have remained higher than our model would suggest. However, the model did indicate an uptick in inflation this year. While it would expect a lower number for this Wednesday’s CPI data release, the inflation pressure will remain high for the next reading in June. Wall Street estimates at +0.3% MoM and +3.6% YoY (vs. 3.5% previously).

👇6-10) Even if we zoom in, the month-on-month difference is tiny. Hence, our best guess is that the risk of a marginally lower inflation print this week will be higher and reverse again next month. But the lower-than-expected number this week will remain relatively unchanged. An upside inflation surprise, as in each of the previous two months, that caused Bitcoin to sell off, appears less likely based on OUR estimates. As mentioned above, Wall Street has slightly higher expectations.

👇7-10) Our model leads by two months, and it appears that the model got the turning points right in June 2023 (higher), then in September 2023 (lower), and then again in January 2024 (higher). The data point we are receiving on Wednesday is only a tiny bit lower than the previous month, which is why there are shallow expectations that Bitcoin would make a significant move up or down based on this number.

👇8-10) We doubt that lower-than-expected inflation would set off the animal spirits and cause a big rally. Our calculations suggest that CPI will remain high for another three months and then fall back towards 3.0% (however, we need the model’s confirmation, which is ‘officially’ only two months ahead).

👇9-10) This would imply that Bitcoin could make a sizeable up-move on the back of lower-than-expected inflation by August, with the Fed then shifting back to verbally confirming rate cuts. Hence, we are still expecting a meaningful rally later in the year. Patience is the name of the game right now. Ideally, we are presented with better re-entry levels to take advantage of.

👇10-10) In the short term, the market structure still appears to be a roadblock for any Bitcoin rally, and next week’s SEC decision regarding the ETH ETF could set the mood until the following inflation data points. The best way to trade this week’s inflation data remains: if you are bullish, buy Bitcoin, bearish, short Ethereum. This week’s inflation print will likely not change this. We believe Bitcoin might see 52,000/55,000 before a more meaningful rebound occurs.