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Inflation Is Keeping the Crypto Bear Market Alive

Inflation Is Keeping the Crypto Bear Market Alive
By Vin Narayanan
Date September 15, 2022

If you’re a crypto investor, you might as well grab a Snickers bar because this bear market is not going anywhere for a while.

The crypto bear market is largely being driven by the declining stock markets. The stock markets are struggling because of inflation and higher interest rates. The Fed is going to keep aggressively hiking interest rates (I expect another 75 basis point hike at the end of the month) until inflation is under control. And as Tuesday’s Consumer Price Index (CPI) data showed, inflation is nowhere near under control. 

Inflation increased 0.1% in August. Core inflation — which excludes gas and food prices due to their volatility — increased 0.6%. One of the big concerns is that inflation managed to grow despite the fact that gas prices fell 10.6%.

Three major factors are driving inflation up right now: food prices, rent prices and  healthcare costs. Rent prices account for a third of the CPI and are by far the largest single component. So it’s really hard for overall inflation to come down if shelter inflation is rising (it was up 0.7% in August). 

But rent data gets phased into the CPI calculations. That’s because rent prices don’t shift frequently — at least compared to gas or food prices — and are measured in six-month increments. That makes rent a lagging indicator. So even as rent price hikes slow or prices start to come down, it won’t be reflected in the data right away. That will prop up the overall inflation number even if other indicators like food or gas prices decline. As a result, it will be extremely difficult to get inflation under control in the near term. 

The Fed has signaled to the world that it will fight inflation aggressively. Last week, Federal Reserve Chairman Jerome Powell told the Cato Institute that “my colleagues and I are strongly committed to this project and we will keep at it until the job is done.”

That suggests the Fed will keep raising interest rates until inflation is under control. But investors are afraid that if the Fed raises rates too high (and too quickly), the economy will crash.

It’s a delicate dance: inflation is going up, so the Fed needs to raise rates to bring it under control, but investors worry that higher rates will lead to the economy crashing, which is driving the markets down. And this dance isn’t going to end soon.

As a result, we likely haven’t hit the bottom of the stock market doldrums. And since the stock markets are pushing the crypto markets down, the crypto bear market is going to stick around for longer than we’d like — at least into 2023.

(Wish you ate that Snickers bar now, huh?)

There is good news, though. The crypto markets are actually fairly predictable right now (famous last words). That means there are good times to buy into the market (even as it’s falling). And we know — or at least we think we know — when those good times are.

I’m writing more about this sudden market predictability — and how to take advantage of it — for our Crypto Asset Strategies Members tomorrow (click here to sign up). And we’ll devote a future episode of First Stage Investor‘s Crypto Insider to this topic as well.

It’s a critically important conversation because the best time to buy any asset is during a bear market. The goal is to buy low and sell high. And bear markets are a great time to find low prices.

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