The cryptocurrency market faced significant selling pressure last week, with two main reasons for the capital outflow: the 'California wildfires' and 'strong U.S. employment data', both driving cash demands up and raising concerns about an overheated economy.

The economic loss from the wildfires in Los Angeles, USA, is estimated to reach $135 billion to $150 billion, mainly including insured and uninsured losses of properties like real estate and automobiles. This is a significant increase from the previous estimate of $52 billion to $57 billion. The disaster was primarily fueled by strong winds, resulting in the destruction of over 10,000 buildings, many of which were residential. As the fire approaches high-value areas like Santa Monica and Malibu, the wind is still increasing, which may lead to further losses.

What does this have to do with the cryptocurrency market?

While this may seem like a natural event at first glance, it will affect the short to medium-term trajectory of the cryptocurrency market. Since this area in California is affluent, traditionally favored by Hollywood stars, directors, wealthy individuals, and many entrepreneurs as their residential area, they also hold a substantial amount of stocks and cryptocurrency assets. After this bull market, most wealthy investors in the U.S. have purchased some cryptocurrency or related funds.

Unfortunately, this round of wildfires has destroyed these individuals' assets, such as RVs. They will subsequently need a large amount of cash to rebuild houses and purchase vehicles. Given the high liquidity, stocks and cryptocurrencies will be their priority options for cashing out. They will also have to wait for insurance companies to settle claims to have sufficient cash. This wildfire event will bring short to medium-term selling pressure to the cryptocurrency market.

Inflationary pressures reignited

Apart from possibly liquidating assets to meet the substantial rebuilding needs, this additional demand may ignite new inflationary pressures. Rebuilding will require a large amount of raw materials, including cement, steel, wood, and other construction materials. The newly built real estate will also see a value increase, further driving up local housing prices and rents, which is expected to heighten inflationary pressures. However, investors cannot avoid selling, as post-disaster rebuilding is unavoidable.

Additionally, the U.S. job growth in December reported last week also exceeded expectations. According to data from the U.S. Department of Labor, 256,000 new jobs were added last month, far exceeding economists' predictions of 155,000. Meanwhile, the unemployment rate fell to 4.1%, close to historical lows, indicating that a strong labor market performance may allow the Fed to delay further rate cuts in 2025. The U.S. economy remains robust in its early stages, alleviating concerns of a recession triggered by high interest rates.

In response to the recent rise in inflation and policy uncertainty, there may be a slowdown in interest rate cuts in the future. Although by the end of 2024 rates might be cut by four basis points to reach 1 percentage point, the benchmark interest rate will still be high at 4.25%-4.5%. Additionally, Trump has proposed imposing tariffs of 60%-100% on Chinese goods and a tax of 10%-20% on imported goods. This move will raise prices for American consumers and further exacerbate inflationary pressures. Now everyone is afraid that inflation will make a comeback.

Considering the above two points, the cryptocurrency market will face selling pressure in the short to medium term. The primary negative factors stem from the cash demand for rebuilding after the California wildfires. Given that cryptocurrency has become a relatively common investment asset among wealthy individuals in the U.S., this event will undoubtedly trigger short to medium-term sales, making it more challenging for the market to rise. Stronger selling may occur when reassessing the rebuilding after the disaster, at which point they will sell Bitcoin for cash. Currently, it is just an expectation, so a more conservative strategy is recommended in the near term.

This week's CPI data in the U.S. is the last important data point before the presidential transition. Similar to the employment figures released by the Labor Department, Biden is likely to present a satisfactory report to demonstrate 'success' during his administration. Following this logic, the CPI data should either fall below expectations or meet them, thus not impacting the market significantly. Of course, if the data disappoints, then the previous logic will no longer hold.

On January 20, when Trump takes office, there will be a series of higher-priority issues to address, making it difficult to expect a swift positive impact on the cryptocurrency market. If the positive outcomes fall short of expectations, the market will likely experience turbulence, increasing the chances of a downward adjustment.

In summary, before Trump takes office, it's unlikely that the market will experience a significant downturn. Conversely, if he does not immediately reassure the cryptocurrency market, funds betting on higher prices may panic, likely causing the market to adjust downwards in late January. The situation is dynamic, but the key points in the past two weeks are the performance of CPI data and Trump's stance on cryptocurrency after taking office.