Concerns about US stagflation affect the crypto market as BTC and ETH trading volumes decline

Crypto markets were in the red as concerns resurfaced about U.S. stagflation, a worst-case scenario for risk assets.

Bitcoin (BTC), the leading cryptocurrency by market value, is trading near $62,400 at press time, down 2.5% over a 24-hour period, according to CoinDesk Indices. Ethereum (ETH) is down 3% at $3,200, and the CoinDesk 20 (CD20), a measure of the most liquid digital assets, is down 2.6% at 2,197.

The market seems to be on the precipice right now, debating which direction to go, with major bullish and bearish comments on the horizon.

As QCP wrote in a report over the weekend, the threat of stagflation (a period of high inflation and low growth) is very real.

"Weaker-than-expected U.S. GDP data pointed to a more subdued economy, while higher core personal consumption expenditures warned that inflation concerns will remain a thorn in the Fed's side," QCP wrote.

Last week’s U.S. GDP report showed the world’s largest economy grew at an annualized rate of 1.6% in the first quarter of this year, following a 3.4% increase in the previous quarter. Meanwhile, the Federal Reserve’s preferred inflation gauge, the personal consumption expenditures price index (PCE), showed prices rising to an annualized rate of 3.4% in the first three months of this year, from 1.8% in the final quarter of 2023.

The stagflationary combination of slowing growth and sticky inflation further weakens the likelihood of the Fed cutting interest rates.

Most traders on prediction market platform Polymarket still believe that the most likely scenario is no rate cut, with a 35% chance of this happening, but the probability of one rate cut is gradually rising and is currently 29%, compared with 26% a week ago and 14% at the beginning of the month.

QCP also wrote that Janet Yellen's fiscal strategy, using the Treasury General Account (TGA) which holds nearly $1 trillion in assets and the $400 billion Reverse Repo Program (RRP), could inject up to $1.4 trillion in liquidity into the U.S. economy. The financial system is pushing all risk assets higher.

The key to the continuation of Bitcoin’s bull run is the U.S. Treasury’s upcoming quarterly refund announcement, which will maintain or reduce the current TGA balance of $750 billion.

This $750 billion figure in the TGA is critical because it sends an important signal to financial markets about the U.S. government’s fiscal intentions, with profound implications for economic stability and growth.

Meanwhile, the Bitcoin exchange-traded fund (ETF) launched in Hong Kong on April 30 has also attracted the attention of traders.