Rising US and UK inflation prompts crypto sell-off

·2 min read
Bitcoin was down roughly 4%. Photo: Reuters
Bitcoin was down roughly 4%. Photo: Reuters

Cryptocurrencies were broadly lower on Wednesday morning as rising inflation in both the US and UK fuels the view that central banks will soon have to raise interest rates.

Bitcoin (BTC-USD) fell 3.8% to $31,894 (£23,041), losing gains it had made a month ago, when it had hit a high of $41,330 on 15 June. It still remains a long way from its all-time high of $63,000, which it had reached in April this year.

Ethereum (ETH-USD) declined 6.7% to $1883, while joke token Dogecoin (DOGE-USD) fell 6.6% to $0.19.

The cryptos were earlier hit hard by global regulatory action. Now it seems the sell-off has been triggered by inflation: US inflation hit a 13-year high in June, driven by a rise in the cost of used cars, with consumer prices rising 5.4% year on year.

Inflation has been rising as economies ease lockdown restrictions. Over in the UK, inflation jumped to 2.5% in June, the highest figure seen since August 2018 and outstripping forecasts made by economists.

It has also gone beyond the Bank of England’s target of 2%. Earlier, the bank’s outgoing chief economist warned inflation could climb as high as 4% by December.

Bitcoin fell on Wednesday morning. Chart: Yahoo Finance UK
Bitcoin fell on Wednesday morning. Chart: Yahoo Finance UK

Central banks in both countries will now likely mull whether to raise interest rates, a tool often used to stop inflation from spiralling out of control.

“Bears hijacked the stock markets yesterday following the release of inflation data which published figures that were higher than what economists expected,” said Naeem Aslam, chief market analyst at Ava Trade.

He said bitcoin slumped following this frenzy in the financial markets.

But he reiterated a point he has made many times in the past couple of months, that crypto enthusiasts are taking advantage of any opportunity to get a good deal as institutional investors continue to pour money into this space.

The latest example of this is Capital Group, one of the world's largest investment management firms, entering the market.

It has acquired a 12.2% stake in MicroStrategy (MSTR), which is heavily invested in Bitcoin and has purchased Bitcoins worth $2.74bn since the end of June.

Read more: Pound spikes as inflation surge ups pressure on BoE to hike rates

“As a result of this transaction, Capital Group has gained indirect exposure to the digital assets, reassuring investors that the crypto sector has a bright future,” said Aslam.

Earlier this week the Metropolitan police's economic crime command seized almost £180m of Bitcoin following an investigation into international money laundering. The Met also confiscated £114m of the cryptocurrency last month.

Cryptocurrencies have been under much pressure for regulation from global governments to central banks, with several countries imposing measures to regulate digital tokens.

Watch: What are the risks of investing in cryptocurrency?