WHAT IS INFLATION AND HOW IT AFFECTS CRYPTO CURRENCY
What is Inflation?
Inflation is when a depreciation of a dollar, like the US dollar, increases the price of goods and services over time, thus helping the economy grow. However, unlike fiat currencies, cryptos cannot be used in the same way by changing interest rates, or so.
In early May, bitcoin (BTC) and ether (ETH) met with news of interest rates through FEDs, rising by about 3.5% and 1.2%, respectively. Inflation has been the single driver of widespread losses in all crypto markets. The United States Federal Reserve has announced a 0.5% increase in interest rates, the highest interest rate in the last two decades.
While cryptocurrencies saw short-term inflation after interest rate hikes, price gains could not continue. Many analysts, however, still believe that crypto currency has always behaved in line with stocks, such as large tech stocks.
Bitcoin - inflation hedge?
In the post-epidemic period, the strength of the USD against BTC has declined sharply, declining sharply in March 2020, followed by another decline in late 2020, as seen above. In addition, the value of the USD has also declined due to the ongoing printing of the government.
Over the past 50 years, inflation has already reduced the USD value by 85%, which has strengthened the BTC account as one of the best fiat currencies. However, in November 2021, after making a peak of $ 69,000, the price of bitcoin began to decline. About the same time, the strength of the USD against BTC began to rise, beginning to rise in November-end of 2021 and March 2022.
Significantly, the purchasing power of the USD against BTC has been on the rise for most of this year. The same puts the story of the inflation hedge of bitcoin at risk. In addition, the ongoing challenges surrounding market volatility and the high price of a single BTC unit are causing tensions for investors, especially newcomers.
Although other investment methods such as bitcoin-based ETFs and BTC ETPs have provided significant exposure to investors of all types, the ongoing volatility continues to plague BTC traders and investors and new entrants to the market.
Cryptocurrencies and inflation
In most of the existence of bitcoin, BTC prices have not responded negatively to the shock of policy uncertainty, in part in line with the independent view of Bitcoin in government authorities. However, amid very cheap market conditions, social and political issues have played a major role in establishing the BTC price track over the past two quarters.
In addition, the rise in BTC's relationship with the two major indicators - the S&P 500 and Nasdaq - could play the S&P 500 and Nasdaq could play spoilsport in the inflation index as the market matures.
The price of Bitcoin fell by 57.02% to its peak of $ 69,000, which also hampered the high-profile currency record as a stock market. At the time of writing, BTC traded at $ 29,504.67, close to $ 30,000 for psychological support / resistance level.
The coin has kept track of between $ 31,500 and $ 28,380 since May 10.
At the moment, as the larger market tends to be more bearish, whether BTC can outperform commodities and fiat currencies remains an important question. Many analysts are of the opinion that the growing market for bitcoin and cryptocurrency has provided a way to reduce ROI over the years.