Bitcoin Stumbles After the Jobs Report but Keeps Afloat. One Major Crypto Risk.

Investors across markets had already eyed the jobs report as a key catalyst before its release. The U.S. added 528,000 jobs in July, signaling continued strength in the labor market despite high inflation and rising interest rates. Economists had expected that 258,000 jobs would be added last month.

The health of the economy is a crucial indicator at the moment amid expectations that the Federal Reserve will continue to tighten monetary policy in a bid to rein in red-hot inflation, which is at its highest in four decades.

The Fed has already raised interest rates multiple times this year, with 75 basis-point hikes in both June and July marking the largest increases since 1994. The central bank is expected to continue down this path of tighter policy through the rest of the year, before cooling off in 2023.

Signs that the economy is weakening, such as a deterioration of the labor market, could stem the pace of the Fed’s tightening. This is important for cryptos because a more aggressive Fed raises the prospect of a recession, which is an economic environment that would be far from friendly to risky bets like Bitcoin. 

The strong jobs report was met by a slip in crypto prices as well as stocks—likely as traders saw the economy as being strong enough to handle a more aggressive Fed. However, the lack of a major tumble in Bitcoin prices after what was a blowout report could signal some optimism that the economy is stronger than expected, and therefore more capable of withstanding tighter monetary policy and avoiding recession.

The fact that cryptos reacted along with stocks to the jobs report represents the correlation between cryptos and other risk-sensitive assets, like equities, which has become stronger over the past year. While digital assets do react to factors within crypto itself—like the meltdown of stablecoin Terra or failure of hedge fund Three Arrows Capital—Bitcoin and its peers have largely followed the S&P 500 and Nasdaq lower, and then higher, in 2022.

But that correlation has recently been weakening—in a bad way for Bitcoin.

“Seven straight daily red candles for Bitcoin while equities have caught a bid,” Dylan LeClair, an analyst at crypto fund UTXO Management, said via Twitter. Red candles refer to a session in which Bitcoin closed lower on the day.

“Bitcoin has served as equity market beta for all of 2022, and is now selling off in an uptrend,” LeClair added. “If/when equities turn over next, expect a firesale.”

Beyond Bitcoin, Ether —the second-largest token—gained 3% to $1,650. Smaller cryptos, or altcoins, were similarly strong, with Solana up 3% and Cardano 2% higher. Memecoins—initially intended as internet jokes—exhibited much of the same, as Dogecoin and Shiba Inu advanced 3% and 1%, respectively.

Write to Jack Denton at jack.dentondowjones.com