Bitcoin Hits One-Month High Ahead of US Inflation Data

Bitcoin (BTC) rose on Tuesday as investors braced for crucial U.S. data likely to show that the consumer price index (CPI) growth is slowing in response to Federal Reserve's (Fed) aggressive liquidity tightening.

The leading cryptocurrency neared $17,500 for the first time since Nov. 1, shrugging off concerns about the health of dominant digital assets exchange Binance.

Other cryptocurrencies including ETH, XRP, DOT, MATIC and LTC rose, albeit by less than bitcoin's 24-hour gain of 2.4%, CoinDesk data showed.

Bitcoin probably benefited from haven flows stemming from the unease about the health of the dominant cryptocurrency exchange Binance. The cryptocurrency's dominance rate, or the share in the crypto market, rose to 41.4%, the highest since Oct. 29. Historically, traders have piled into bitcoin, lifting its dominance rate during times of stress in the broader market.

"Bitcoin's dominance has finally broken above 41%. Its a textbook de-risking market signal," Lewis Harland, portfolio manager at Decentral Park Capital, said in a daily market note.

In addition, the pre-U.S. CPI gain of 0.5% in the futures tied to the S&P 500, the benchmark for risk assets worldwide, likely helped bitcoin.

The CPI inflation is forecast to have slowed to an annual pace of 7.3% in November, reaching the lowest since December 2021 and down from October's 7.7% increase, according to a consensus estimate by Refinitiv.

Meanwhile, the growth in core CPI, which strips out the volatile food and energy component, is expected to have slowed to 6.1% from October's 6.3%.

A soft inflation print will likely bolster hopes for a so-called Fed pivot in favor of easing, bringing cheer to risk assets. The Federal Reserve has raised rates by 375 basis points since March to control rampant inflation and the liquidity tightening has ruined risk assets, including bitcoin.

Bitcoin traders, however, are playing it safe, and perhaps rightfully so, as a hotter-than-expected CPI could dash the already elevated Fed pivot hopes, triggering broad-based risk aversion and flight to safety.

"BTC futures open interest remains flat at $8.25 billion while funding rates skew negative. Traders are taking a predominantly bearish stance," Harland said.

Open interest refers to the dollar value locked in the number of active futures contracts. The funding rate, charged every eight hours by exchanges, refers to the cost of holding bullish/bearish positions in the perpetual futures market. A negative rate implies bears are paying the bulls to keep their positions open and leverage is skewed on the bearish side.

Griffin Ardern, a trader from crypto asset management firm Blofin, said traders are trying to go long on volatility.

Traders typically go long on volatility by purchasing both bullish call and bearish put options. The strategy makes money if the underlying asset either surges or tanks enough to recover more than what was paid to purchase calls and puts.

Bitcoin may see heightened price volatility, as too may market-moving events are lined up in the next 72 hours.

"The central banks of the four countries – the U.S., Japan, European Union and the U.K. – will announce interest rate decisions this week. Plus, we have Powell's speech and the U.S. CPI release. The superimposition of many uncertainties will inevitably cause panic in the market," Ardnern noted.