Investing in cryptocurrencies has a number of advantages. Let’s talk about inflation vs cryptocurrencies. Some people see cryptocurrency as a fast means to cash in, while others see it as a chance to put their faith in blockchain technology or a certain project. Getting into cryptos might be as simple as hopping on the hype train for some, mostly because of FOMO.
Aside from that, cryptocurrencies such as Bitcoin have been hailed as effective inflation hedges and stores of wealth for their ability to defy inflation. Is there a correlation between inflation and cryptocurrencies?
A definition of inflation
It is called inflation when the rising cost of goods and services is caused by a currency’s declining value, such as the US dollar. Although interest rates may be used to influence fiat currencies, cryptos cannot be manipulated in the same way, they said.
After the Federal Reserve raised interest rates in early May, the price of bitcoin (BTC) and ether (ETH) surged by around 3.5 percent and 1.2 percent. Cryptocurrency markets have taken a beating due to rising inflation. The Federal Reserve in the United States has raised interest rates by 0.5 percent, the largest increase in two decades.
While the announcement of the interest rate rise caused a short-term jump in the price of cryptocurrencies, the price gains could not be sustained. To a large extent, cryptocurrency experts are still of the opinion that the asset class is acting like an equity stock, much like a giant tech company.
Inflation hedge: Is Bitcoin the answer?
US Dollar’s purchasing power versus BTC continued to decline in post-pandemic times, with a major decrease in March 2020 followed by another loss at year-end, as seen above. As a result of the government’s ongoing creation of money, the USD’s value has fallen even lower.
After 50 years of inflationary pressure, BTC’s claim that it is a better alternative to fiat money has been reinforced. When bitcoin’s price hit an all-time high of $69,000 in November 2021, it started its downward trajectory. In November-December 2021 and again in March 2022, the purchasing power of the US dollar versus BTC began to grow.
For the most part, the purchasing power of the US dollar versus the bitcoin has increased this year. Bitcoin’s claim to act as an inflation hedge is now in jeopardy. Additionally, investors, particularly newbies, have difficulties because to market volatility and the high price of a single BTC unit.
While Bitcoin mining-backed ETFs and BTC ETPs have provided investors of all kinds with excellent exposure, the persistent volatility in the BTC market continues to hound traders and investors in the market and newbies alike.
The relationship between cryptocurrencies and the rate of inflation
Bitcoin prices haven’t responded badly to policy uncertainty shocks over the majority of the cryptocurrency’s history, which is in line with the idea that Bitcoin is decentralized and not controlled by governments. BTC’s price trend over the last two quarters has been heavily influenced by socio-political problems, despite a mainly gloomy market environment.
Bitcoin’s increased correlation with S&P 500 and Nasdaq might also sabotage its inflation hedging story as the market develops.
After peaking at $69,000, Bitcoin’s price has fallen by 57.02 percent since then. This has made it less attractive to investors as a store of wealth. Nearly $30,000 psychological support/resistance has been established for BTC as of this writing.
Since May 10, the currency has been trading in a narrow range between $31,500 and $28,380.
For the time being, it’s unclear if Bitcoin can beat conventional assets and fiat money, given the market’s current negative slant. Since bitcoin and cryptocurrency markets have matured, many observers believe that returns on investment (ROIs) have decreased over time.