How Can Inflation Affect Cryptocurrencies like Bitcoin and Ethereum?

Investments in cryptocurrencies are appealing for many reasons. While cryptocurrencies can be a quick way for some to make money while they sing ‘wen lambo’, others prefer the trust in blockchain technology and a specific project. Some people may think that getting into cryptos is as simple as jumping on the hype train. This is primarily because of FOMO.

All of that aside, cryptocurrencies such as Bitcoin are often called an excellent inflation hedge or a store-of-value. As inflation continues to rise, how do cryptocurrencies and inflation intersect?

What is inflation?

Inflation refers to the process whereby a currency’s declining value, such as the US dollar, causes an increase in the cost of goods and services, which helps the economy grow. Cryptos, however, are not able to be altered in the same way as fiat currencies by changing interest rates.

bitcoin and ether rallied after the announcement of an interest rate hike by FEDs in May. They rose about 3.5% and 1.2% respectively. One factor responsible for large losses in crypto markets has been the soaring inflation. The United States Federal Reserve announced an increase of 0.5% in interest rates. This is the largest hike in interest rates in two decades.

Although cryptocurrencies experienced short-term price increases following the announcement of the interest rise, these price gains were not sustainable. Analysts believe that cryptocurrencies behave in line with equities and are similar to big tech stocks.

Bitcoin – An inflation hedge?

The USD’s purchasing power against BTC continued to fall in the post-pandemic period. It took a substantial dip in March 2020 and then dropped again towards the end 2020. Due to continuous money printing by the government, USD’s value also fell.

Inflation has already decreased the USD’s value by 85% over the past 50 years. This strengthened BTC’s reputation as an excellent alternative for fiat money. After reaching an all-time high at $69,000 in November 2021 bitcoin’s prices began to fall. The USD purchasing power against BTC began to increase around the same time. It increased in November-end 2021, and then again in February 2022.

Notably, USD’s purchasing power against BTC has been on an upward trend for most of the year. This puts at risk bitcoin’s inflation hedge narrative. Investors, particularly newcomers, are also affected by market volatility and the high cost of one BTC unit.

Investment alternatives such as bitcoin mining-backed ETFs or BTC ETPs offer decent exposure for investors of all levels. However, BTC traders, investors, and newcomers to the market are still plagued by the constant volatility.

Inflation and cryptocurrencies

BTC prices have not reacted negatively in the majority of bitcoin’s existence to policy uncertainty shocks. This is partly consistent with Bitcoin’s independence of government authorities. However, despite largely bearish market conditions and a significant role in setting BTC’s price trajectory for the past two quarters, socio-political factors have been a major factor.

BTC’s increasing correlation with the major indices-the S&P 500 & Nasdaq – could play a S&P 500 or Nasdaq role in the coin’s inflation hedge narrative.

Bitcoin’s value fell 57.02% to $69,000, its record high. This also hurt the coin’s ability to be used as a store-of-value. BTC was trading at $29,504.67 as of the writing date, which is close to the $30,000 psychological resistance/support level.

Since May 10, the coin has been in a rangebound trend between $31,500 to $28,380.

It is still unclear whether BTC will outperform fiat currency and traditional assets in the near future, as the market tends to be more bearish. Many analysts believe that the declining ROIs of cryptocurrency and bitcoin markets over the years have led to a maturing market.