The cryptocurrency market had a short-lived but ultimately failed rally after softer-than-forecast U.S. inflation figures. In spite of early hopes, the rally lost momentum as concerns over wider market issues, such as geopolitical tensions and uncertainty over central bank policy, remained to dampen sentiment
Bitcoin (BTC), the market capitalization leader, lost 0.5% in the last 24 hours, trading at $82,800. The CoinDesk 20, an index of the top 20 cryptocurrencies, excluding exchange coins, stablecoins, and memecoins, lost 0.8% during the same time, suggesting weakness was widespread across the crypto space.
Ether (ETH), the second-largest cryptocurrency in terms of market capitalization, lagged behind. ETH fell 2.5% to around $1,860, and it became the worst-performing asset in the CoinDesk 20 index. The ETH/BTC ratio is currently 0.022, a level last seen in April 2020, just before the decentralized finance (DeFi) summer that pushed platforms such as Uniswap and MakerDao into the limelight. The ETH/BTC ratio has dropped by an eye-popping 67% since it hit its all-time peak in November 2021.
Market Response Dampened Despite Positive Inflation Reading
The subdued reaction from the crypto market came as the U.S. Consumer Price Index (CPI) for February printed lower than anticipated at 2.8% on a year-over-year basis, from 3.1% in January. This was below the forecasted estimate of 2.9%, and it brought hopes that inflationary pressures are weakening and the Federal Reserve might soon shift towards reducing interest rates.
Generally, lower inflation rates are considered to be positive for risk assets, such as cryptocurrencies, because they are an indicator of possible monetary policy loosening. Yet, the lackluster reaction in the crypto market indicates that wider worries are dominating over the short-term effect of inflation news.
“Today’s below-expect CPI should be positive and point to more rapid rate cuts, but crypto has not responded strongly,” emailed Dr. Youwei Yang, BIT Mining’s Chief Economist, to CoinDesk. “Weeks of fear in the market take more than one good print to restore confidence.”
Macro Headwinds Weigh on Crypto Sentiment
Yang referred to geopolitical tensions and policy uncertainty as the most important contributing factors to not seeing a sustained crypto rally. Perhaps the most substantial overhang is the former President Donald Trump’s aggressive tariff policy, which has pledged to charge high tariffs on Chinese imports if he is re-elected.
Trump’s suggested tariffs can have a double impact on the financial markets and the overall economy. On the one hand, increased tariffs will raise the price of imported items, which might push inflation to a higher level. On the other hand, heightened trade tensions and retaliations by China can upset global supply chains and economic growth, and hence the financial markets can dip.
The Department of Government Efficiency (DOGE) also recently issued a wave of layoffs, putting additional pressure on the Federal Reserve to look at slashing rates to spur the economy. Yet the Fed is cautious, as early rate cuts would fuel inflation and make future policy decisions more difficult.
Federal Reserve Policy Outlook
The market now anticipates the Federal Reserve to start reducing rates as soon as May or June. Based on interest rate futures data, the market is currently pricing in the chance of up to 100 basis points (or 1%) of rate reductions by October.
The Federal Reserve has been holding back on rate cuts even as the inflation outlook has been improving. Fed Chairman Jerome Powell has reaffirmed that the central bank is still focused on meeting its 2% inflation goal on a sustainable basis before it would think about any meaningful change in monetary policy.
The gentle February CPI reading provides the Fed with some leeway, but persistent geopolitical uncertainty and domestic economic stress muddy the policy picture. If inflation stays in check and growth begins to decelerate, the Fed might be able to cut rates with ease. But if inflationary pressures re-emerge as a result of tariffs or supply chain dislocations, the Fed might have to keep rates higher for longer.
Bitcoin and Ethereum Downside Action Indicts Broader Market Jitters
While Bitcoin’s 0.5% decline might appear moderate, it is indicative of broader market uncertainty. Bitcoin has been unable to hold strength above the $85,000 mark, with selling interest surfacing whenever the price tests this resistance level.
Ethereum’s underperformance against Bitcoin reveals deeper structural issues in the crypto market. The ETH/BTC exchange rate, currently at 0.022, is at its lowest in four years, indicating that investors are shunning Ethereum and other altcoins in favor of Bitcoin.
The fall in Ethereum’s market share may be a result of various reasons:
- Regulatory confusion over Ethereum-based staking and DeFi platforms.
- Decreased network usage on Ethereum relative to the DeFi boom in 2020 and 2021.
- More competition from other smart contract platforms like Solana (SOL) and Avalanche (AVAX) that have gained market share.
- Wider Financial Markets Record Modest Rebound
- As the crypto market struggled to hold onto gains, wider financial markets recorded a modest rebound. U.S. stocks recorded modest advances on Wednesday as the S&P 500 gained 0.5% and the Nasdaq was up 1.2%.
The modest bounce follows a steep selloff over the past several weeks, where the S&P 500 dropped by about 10% from recent highs. The equity relief rally is evidence of better sentiment among investors as a result of the softer CPI reading, yet market participants remain wary of the overall macro picture.
Bond markets too captured increasing expectations for rate cuts. The 10-year U.S. Treasury note yield dropped by 8 basis points to 3.82%, which suggests that investors are increasingly placing their bets on a move toward more accommodative monetary policy.
Crypto Market Structure and Liquidity Issues
Apart from macroeconomic forces, structural issues in the crypto market can also be driving the poor price action.
- Reduced liquidity on major exchanges has led to increased price volatility.
- Institutional involvement in crypto markets has been lukewarm, with most large funds keeping a wait-and-see attitude because of regulatory ambiguity.
- Reducing stablecoin supply indicates that capital is exiting the crypto ecosystem instead of being invested in new assets.
- The market response to the inflation report indicates that crypto investors are waiting for more tangible evidence of a policy change by the Federal Reserve before taking on new long positions.
Possible Catalysts for a Crypto Rebound
To have the crypto market resume its upward momentum, some of the following factors could serve as catalysts:
- More definitive guidance from the Federal Reserve on the timing and size of rate cuts.
- Resolution of geopolitical tensions, especially on U.S.-China trade.
- More institutional involvement led by enhanced regulatory transparency and fresh product launches.
- Rebound in Ethereum network activity through fresh DeFi and NFT developments.
- Widening risk-on mood in world financial markets.
- Crypto market participants in the near term will be intently focused on forthcoming economic data releases, Federal Reserve commentary, and geopolitical events for indicators of changing market dynamics.
Conclusion
The weaker-than-forecast U.S. inflation report offered a short-lived lift to cryptocurrency markets, however, as other macroeconomic and structural issues took center stage again. Bitcoin and Ethereum both registered declines, and Ethereum’s weak performance underlined underlying market difficulties.
With the Federal Reserve expected to begin cutting rates later this year, crypto markets may eventually benefit from a more accommodative monetary policy environment. However, geopolitical risks, trade tensions, and domestic economic pressures remain significant headwinds. Until these factors are resolved, crypto markets are likely to remain volatile and directionless.
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Do Follow – https://www.coindesk.com/markets/2025/03/12/crypto-rally-doesn-t-hold-after-soft-inflation-data