What happened

Most cryptocurrencies are falling today along with tech stocks, as investors gear up for key inflation data tomorrow that has the potential to move markets in a big way.

Over the last 24 hours, the price of the world's largest cryptocurrency, Bitcoin (BTC 0.75%), had fallen roughly 4% as of 2:49 p.m. ET today. In that same time frame, the price of the world's second-largest cryptocurrency, Ethereum (ETH 3.40%), had fallen roughly 5%, and the price of meme token Shiba Inu (SHIB 2.96%) traded nearly 8% lower.

So what

Tomorrow morning, the U.S. Bureau of Labor Statistics (BLS) will unveil July data for the Consumer Price Index (CPI), which tracks the prices of a wide range of consumer goods and services. Investors use it as one way to gauge inflation. In June, the CPI surprised the market, rising 9.1% year over year. But investors were relieved to some extent because a big chunk of the gain had come from a rise in energy and gasoline prices, which started to come down in July.

Red line with arrow trending downward.

Image source: Getty Images.

Economists are expecting an 8.7% year-over-year increase for July, reflecting the drop-off in energy prices, but investors will also be hoping to see other price categories fall as well, whether it's transportation, food, or rent. 

If the CPI comes in at 8.7% or below, there is a decent chance the market reacts favorably because it could mean that inflation is peaking, which may allow the Federal Reserve to ease off a bit when it comes to hiking interest rates. If the CPI comes in above 8.7% the market may not react so favorably. Rising rates have crushed the likes of Bitcoin and other cryptocurrencies this year because higher rates make risky growth assets less appealing, and crypto had been on a tear in 2021.

But investors are starting to think that the worst may now be behind crypto. JPMorgan Chase analyst Kenneth Worthington recently said in a research note that crypto has "found a floor despite trading volumes still being depressed."

Worthington attributes this to investors settling down after the collapse of the algorithmic stablecoin TerraUSD and now being less worried about the impact on the broader crypto market. In addition, investors also seem to be excited about a series of ongoing upgrades to Ethereum's network that are expected to drastically improve the network, which may be completed sometime this year.

Now what

While crypto seems to have stabilized in recent weeks, it still seems to be trading with some correlation to tech stocks, as evidenced by today's trading activity and investors' anxiety over the CPI report tomorrow.

I do think if the CPI comes in worse than expected and stocks fall, Bitcoin could go lower and fall back to some of the annual lows it was seeing in June. If the CPI comes in better than expected, that likely has a good chance to send crypto prices higher.

Long term, I do see Bitcoin and Ethereum as good investments, given their growing acceptance across the globe and in the mainstream financial system. I have no interest in meme token Shiba Inu because it does not have any practical use cases or technical advantages over other cryptocurrencies.