How can inflation affect cryptocurrencies like Bitcoin and Etherium?

Over the past two quarters, in the midst of a major market downturn, socio-political issues have played a key role in shaping the BTC’s price trajectory.

Cryptocurrency as an investment is attractive for a variety of reasons. For some, cryptocurrency is a quick way to make money because they pronounce ‘Wayne Lambo’, for others it’s reliance on blockchain technology or a specific project. For some, getting into crypto can be as basic as jumping on a hype train, primarily because of FOMO.

After all, cryptocurrencies like Bitcoin are often called an excellent inflation hedge and a treasure trove. So, if inflation continues to rise, where does cryptocurrency and inflation cross paths?

What is inflation?

Inflation is when the depreciating value of a currency, such as the US dollar, increases the value of goods and services over time, thus helping the economy to grow. However, unlike fiat currencies, cryptocurrencies cannot be manipulated to the same extent by changing interest rates, or so they say.

In early May, Bitcoin (BTC) and Ether (ETH) rallied on the news of the Fed raising interest rates, rising about 3.5% and 1.2%, respectively. Rising inflation is a driver of massive losses across the crypto market. The US Federal Reserve has announced a 0.5% increase in interest rates, the highest increase in interest rates in two decades.

Although cryptocurrencies saw short-term price increases following the news of interest rate hikes, price gains could not be sustained. Many analysts, however, still believe that cryptocurrencies are behaving consistently with equities, like a large technology stock.

Bitcoin – An Inflation Hedge?

In the post-epidemic era, the purchasing power of the USD against the BTC has further declined, significantly declining in March 2020, then another drop towards the end of 2020, as seen above. In addition, the USD has depreciated further due to the government’s continued printing of money.

Over the past 50 years, inflation has already reduced the value of the USD by 85%, which has strengthened the description of BTC as an excellent alternative to Fiat money. However, in November 2021, after hitting an all-time high of $ 69,000, Bitcoin prices began to decline. Around the same time, USD purchasing power against BTC began to increase, appreciating in late November 2021 and then again in March 2022.

Significantly, the purchasing power of USD against BTC has been on the rise for most of this year. This puts the Bitcoin inflation hedge description at risk. In addition, market volatility and the constant problems surrounding the high price of a single BTC unit create friction for investors, especially newcomers.

While investment options such as Bitcoin Mining-backed ETFs and BTC ETPs offer decent exposure to all types of investors, continued volatility continues to drive BTC traders and investors and newcomers to the market.

Cryptocurrency and inflation

For the most part in the existence of Bitcoin, BTC prices have not reacted negatively to the push of policy uncertainty, which is partly consistent with the notion of Bitcoin independence from government authorities. However, in the midst of a larger market downturn, socio-economic issues have played a key role in shaping the price of BTC over the last two quarters.

Furthermore, the increasing correlation of BTC with the two main indicators – S&P 500 and Nasdaq – could play an S&P 500 and Nasdaq currency inflation could plunge into the hedge statement as the market matures.

The value of Bitcoin was 57.02% lower than the all-time high of $ 69,000, which also hindered the description of the top currency as a repository of value. At the time of writing, BTC traded at $ 29,504.67, close to the $ 30,000 psychological support / resistance level.

The currency has maintained a range bound trajectory between the 10 31,500 and $ 28,380 mark since May 10.

For the time being, as the larger market tends to be more bearish, the question remains whether BTC can outperform traditional assets and fiat currencies. Many analysts believe that the mature bitcoin and cryptocurrency markets have given way to declining ROI over the years.

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