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Crypto investors focus on mid-September as August rally cools

After improving economic data and low trading volume fueled crypto’s rally through the first half of August, cryptocurrencies tumbled early Friday morning.

Now, investors are weighing their options ahead of a crucial series of events slated for mid-September, when inflation data, the Federal Reserve's latest rate hike, and the Ethereum Merge are all set to take place in quick succession.

On Friday, bitcoin (BTC-USD) and ethereum (ETH-USD), were down around 8% in the last 24 hours, with bitcoin trading below $21,400 and ether dipping under $1,700.

“They call this period the summer doldrums,” Sean Farrell, head of digital assets research with Fundstrat told Yahoo Finance Live on Friday.

“Fund managers are taking time off and in this low volume environment, a lot of people are sitting on their hands waiting for the macro situation to look more constructive.”

Since early June, the total crypto market has climbed from a low of $820 billion to $1.04 trillion. Over that time trading volumes have remained well below last year's lowest trading period — June through July 2021 — according to CoinMarketCap. Daily volumes have been muted, consistently hovering below $70 billion for the past 60 days.

From its November 2021 peak to its most recent bottom on June 18, bitcoin lost 72% of its value. The implosion of the $45 billion Terra ecosystem has sent at least three major crypto firms into ongoing bankruptcy proceedings.

Going forward, Farrell said "investors are going to want to stay on the balls of their feet" as market dynamics could change very quickly, with investors looking at both economic and technical factors to set the tone for crypto markets over the balance of the year.

“We’re anticipating things to pick up in September,” Michael Safai, a partner with crypto proprietary trading firm, Dexterity Capital told Yahoo Finance.

Both Safai and Farrell see a key nine-day stretch between September 12-21, during which they forsee heightened volatility in crypto markets.

On September 12, new inflation data will come when the BLS releases its latest Consumer Price Index. The same day, the Chicago Mercantile Exchange (CME) will launch an options product for ether futures.

Days later, the second largest cryptocurrency's underlying blockchain, Ethereum, will initiate its final transition from proof of work to proof of stake, which crypto investors have dubbed “The Merge.”

Long awaited, but not wholly understood by many, "The Merge" will eliminate crypto mining for Ethereum, cutting its energy costs by 99% according to estimates from the Ethereum Foundation, while the move to staking could fundamentally change the value of ether.

Although he expects growing retail enthusiasm around the merge, Safai pointed out that, “the upside could be limited in the event sentiment for the Merge is met with dour economic data.”

Either way, he is planning for more volatility.

Luke Farrell, a crypto trader who handles over-the-counter spot and derivatives orders for crypto market making firm GSR, is eyeing the period as a crucial breakpoint for how the broader crypto market might perform through the fall.

"All those events combined together usually means a lot of uncertainty and that could mean an uptick in volume but I think the information value from that September period will also prove a lot higher than August," Farrell said. "There will be a lot more to read through about what happens next."

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