Inflation's direction will drive crypto's action in March now that the 2023 rally has faded

Published Wed, Mar 1 202311:30 PM EST

Crypto could be in for a sideways month as inflation concerns come back into focus. Bitcoin and ether are starting the new trading month on a positive note – following a relatively flat month – each rising less than 1% Wednesday. Meanwhile, the stock market extended its slide from the previous session. Their modest February gains pale in comparison to their big January surge, but many investors still see it as a winning month. Bitcoin eked out a monthly gain of 0.8% and ether inched up 2.5%, while all of the major stock averages posted losses for February . "Bitcoin's been the beneficiary of a flight-to-quality within crypto," said Callie Cox, U.S. investment analyst at eToro. "If you're a stock investor, you could see bitcoin as this growth engine without obvious cashflows. But if you're a crypto investor that's been crushed by a dramatic selloff in an altcoin, bitcoin could be seen as this blue-chip store of value." "It's all relative, but from a portfolio strategy perspective, you can't overlook the inherent risks in crypto," she added. "We still think bitcoin could struggle in a high-inflation, high-rate environment." Bitcoin's correlation with stocks has pulled back in 2023. However, Katie Stockton, a chart analyst and founder of Fairlead Strategies, told CNBC earlier this week that with equities now declining, she expects that correlation to return . Meanwhile, Rob Ginsberg, a technical analyst at Wolfe Research, noted that bitcoin and the U.S. dollar index have been moving higher together, although they typically move inversely. "It's likely one will have to give. In the near term, our bet is on the dollar pulling back," he said Wednesday. "It's an interesting tape out there to say the least," he added, noting the higher dollar and rates, deteriorating commodities and choppy equities. "Even with the recent overbought pullback, crypto continues to hang in there and consolidate." He also said that while it "feels like the fun is over, the charts say differently." "We're buyers of this pullback and see it as a healthy response to their recent overbought conditions. If we're right and more upside lies ahead in the near term, it's tough to think crypto isn't a major beneficiary." What to watch Though industry developments accounted for much of the trading action in February, the Fed's fight against inflation is still very much in focus, Kruger said. He cited inflation as well as regulation and institutional adoption – two big price drivers in February – as the key catalysts going into March. Bitcoin and ether suffered a brief drop of 6% and 8.5%, respectively, after U.S. regulators came out with a series of enforcement actions against crypto companies. Long-term investors see regulation as a positive development ultimately, but it can put pressure on prices in the near term, Kruger said. "These things do bring some uncertainty into the equation, and uncertainty quite often can be, you know, kind of negative," he said. Cox said she has her eye on the big economic reports as well as the Fed's next policy meeting, which begins March 21. "As we move into March, there could continue to be this push-and-pull between high rates and decent economic growth," she said. "Investors' main worry over the past few weeks has been the re-emergence of rising inflation, and how the Fed will respond to it. We may need to see more evidence that inflation is coming down to the Fed's liking before we can resume the rally we saw in January." Breaking past $25,000 Although bitcoin held up in February, investors are unsure when to expect a rocket ship rally . Stockton and Joel Kruger, market strategist at LMAX Group, both emphasized $25,000 as the level top to give more meaning to its gains. It's currently trading at about $23,400, according to Coin Metrics. "While we poked above it on this latest run up in February, we just couldn't establish above," he said. "While we're below $25,200 there still is the possibility that this market continues to pull back and consolidate and that we're not yet ready to see that big breakout." "Everything's been constructive and we held up well, but we really ... need to see a weekly close above that high to start to feel really encouraged about the outlook," he added.