According to research, inflation causes a rise in prices while also depreciating the value of a currency. With what inflation implies or denotes, the big question is: can inflation affect the crypto market?
The impact of inflation on cryptocurrencies has long been a topic of discussion. However, cryptocurrencies have underperformed as prices rise in 2022 due to rising inflation. The value of Bitcoin, the most widely used digital currency, decreased to almost $16,000 in November 2022. This is below its value of 65,000 USD in November 2021.
Is it possible that the inflation affecting the traditional market also affects the crypto market? Read on to learn if inflation truly affects the crypto market.
Understanding Inflation
Inflation is usually described as a steady rise in the prices of goods and services across an economy. Additionally, this affects the economy’s currency, which loses purchasing power.
High production costs, natural disasters, a high unemployment rate, high consumer demand, and company policy are a few causes that could be to blame. So what does this have to do with the cryptocurrency market?
Cryptocurrency and Inflation: Is There a Relationship?
Since cryptocurrencies are speculative investments that could theoretically be used as money, some experts believe they are “digital gold.”
As a result, cryptocurrencies can be a security to invest in (like stocks) or a commodity to trade, like gold. From this vantage point, these values are now susceptible to inflationary pressures.
However, because cryptocurrencies are still relatively new, they have not yet been shown to be a reliableinflation hedge. However, these assertions do not account for the decline in cryptocurrency prices this year. And this isfollowing the Federal Reserve’s decision to fight inflation by raising interest rates.
The rate at which bitcoin’s price fell to $18,000 in the final week of September and then further to $16,000 in November suggests that there may already be a relationship in place.
In general, inflation tends to reduce the value of currencies, but cryptocurrency is not a form of currency. The implication is that it doesn’t react to inflationary pressures as a foreign currency would. But does this explain why some experts say it is not related to inflation?
What Some Advocates Have to Say About Cryptocurrency and Inflation
Some crypto investors and experts contend that cryptocurrencies are a form of anti-inflationary asset. Your cryptocurrency will appreciate as the value of your currency declines. This is because when their local currency appreciates, people usually look for a better store of value.
They might want to store their money in Bitcoin and other cryptocurrencies to maintain their purchasing power as the dollar declines. So positive changes in the cryptocurrency market may result from the effects of inflation-related insecurities.
To avoid inflation and maintain the purchasing power of their currency, some crypto enthusiasts, particularly investors, will want to convert their current assets to cryptocurrencies. As a result, those cryptocurrencies will become even more valuable.
While the cryptocurrency market lost roughly two-thirds of its value in 2021 and 2022, inflation reached 40-year highs during those years. So does this infer that cryptocurrencies experience inflation?
Do Cryptocurrencies Experience Inflation?
Inflation is a possibility for cryptocurrencies. A variety of cryptocurrencies run on various monetary systems. Consider stablecoins, a category of cryptocurrency that aims to have its value tied to fiat currency. Since it is based on the value of actual money, it is directly impacted by the monetary inflation of the fiat currencies to which it is pegged.
Then there’s the issue of digital currencies like bitcoin, which, according to a Bank of America report, haven’t really served as an inflation hedge. This year alone, returns on bitcoin have increased in correlation with those of major stock market indices. This implies that the price of bitcoin typically decreases along with market declines.
Conclusion
The impact of inflation on cryptocurrencies is still not entirely clear. While some experts think that cryptocurrencies are falling because of inflation, others think that inflation actually helps cryptocurrencies succeed. This is because as fiat currency’s purchasing power declines, the profitability of the cryptocurrency market increases.
