High Inflation Fear Triggers a New High in the Crypto Market: Weekly Market Review From TokenInsight

• On Wednesday, U.S. CPI data rose to the highest level since 1990, triggering a wave of panic buying inflation-resistant assets. BTC prices briefly exceeded $69,000, while derivatives and spot markets both broke new highs on multiple indicators.
• The high inflation environment is an important reason for maintaining the high price of cryptos. Although regulators continue to express concern about the high risks in the crypto market, from business executives to ordinary people are using cryptos as tools to fight inflation.
• Against the background of high inflation, the central banks of major capital markets have not considered taking radical measures for the time being, so the accumulation of leverage within the crypto market may become one of the risks to be faced shortly.

CPI & BTC, ETH: "All-Time High"

On Wednesday, the U.S. October CPI hit a record annual rate of 6.2%, far exceeding market expectations. In Europe, Britain's inflation rate has risen to 3.1%, and the upward trend shows no sign of stopping. The governor of the Bank of England "apologized" for this, but in the eyes of investors, this is the same as the meaning behind the US CPI data: the central bank seems to have lost control of inflation. Before and after the CPI data was released, the price of Bitcoin rose to more than $69,000 in a short period due to panic buying demand, and Ethereum broke the $4,800 mark, but then the market quickly retreated. As of the afternoon of November 12, 2021, the price of Bitcoin has stabilized at the $65,000 line.

The sudden price fluctuation caused the market volatility to rise significantly by 10% in a short time and triggered a wave of small-scale liquidations in the derivatives market. The size of perpetual contract positions liquidated on Nov 11 exceeded $600m, the highest level in nearly two weeks, but relatively low compared with Sept and Oct.

This liquidation has not affected the enthusiasm of investors. According to TokenInsight, the value of perpetual contracts open interests on major exchanges in the crypto market has exceeded $62b, the highest in nearly three months. In the options market, the open interest of BTC option contracts on the Deribit exchange alone has once again exceeded 200,000, with a value exceeding $13b.

In terms of market expectations, investors' expectations for the future performance of cryptos have been lowered.

From the perspective of futures premium, compared with last week, the structure curve of the futures premium term showed an overall decline, with the premium falling to about 11% -15%. From the perspective of the options market, the purchase of a large number of put options has caused the market skewness to decline again, and caution continues to prevail.

On the one hand, the above situation is a response to liquidity contraction. On the other hand, it is a precaution against possible radical macro policies (such as interest rate hikes, etc.) in the future. However, judging from the attitude of central banks, the accumulated leverage in the derivatives market may be a risk that needs more attention soon.

Cryptos Become an Important Tool in the Fight Against Inflation

In the context of high CPI, from APPLE CEO Tim Cook to ordinary investors have begun to participate in crypto investment to fight inflation. Robinhood said this week that the number of people on the crypto wallet waiting list currently exceeds 1.6 million, and it is expected to launch a crypto wallet at the end of the first quarter of 2022. The CEO of AMC cinema said on social media that AMC currently supports Bitcoin, Ethereum, Bitcoin Cash and Litecoin payment, and Dogecoin will be the next target payment method. Whether accepting cryptos as an investment method or a payment method, its anti-inflation effect has become an important consensus from enterprises to individuals-at least for now.

Many central banks are not satisfied with the current practice of using cryptos to hedge inflation risks. The Russian Central Bank and the Swedish Central Bank said that cryptos may bring additional risks to financial stability, while the governor of the Indian Central Bank also believed that from the perspective of macro-economy and financial stability, the problems brought by cryptos are very serious. However, at a time when these central banks cannot use the tools at their disposal to stop inflation in a short period, hedging inflation by taking certain risks seems to be a better choice for most people.

At the same time, some institutions do not think that the risks brought by cryptos are difficult to control compared with inflation. Fitch, an international credit rating agency, said that the bitcoin risk in El Salvador's banking industry depends on the adequacy of supervision, and El Salvador's banking industry does not currently face major direct financial or market risks due to bitcoin becoming legal tender.

Based on the current high inflation situation, the risks brought by cryptos may be relatively limited compared with inflation risks. Considering that central banks are still holding different degrees of wait-and-see attitude towards the current inflation situation, the demand for crypto spots or investment exposure to cryptos is still considerable, providing relatively solid support for the price of cryptos, while the near risks may come from within crypto market, such as excessive leverage in the market.