Inflation & Bitcoin: What it means

With inflation in the United States currently sitting at 8.5 per cent, a level not seen since the early ’80s, players in the crypto market are wondering what this means for cryptocurrency prices.

To help understand what these prevailing economic headwinds mean for crypto it is a good idea to look at the performance of the more mature cryptocurrencies, particularly Bitcoin. Bitcoin’s performance against a background of tightening monetary policy and the Russia-Ukraine war reveals that as its circulation grows it has begun to mimic other more developed asset classes.

Bitcoin prices are currently dancing around the US$40,000 mark. According to some market commentators this level represents a key threshold for Bitcoin. They suggest that Bitcoin’s performance from hereon in is make or break between whether the market enters a bullish or bearish phase. Others suggest that concern regarding the $40,000 mark is unfounded and that BTC’s price trajectory either up or down will be informed by global equity markets. Historically, inflation has often signalled lower returns on equities. Therefore, for the crypto traders that agree with the hypothesis that there is a strong correlation between Bitcoin and equity markets, it is likely that they are preparing for a tough few months ahead.  

But if we reflect on this 8.5 per cent level some would say that isn’t just inflation, but rather the far more dramatic hyperinflation. If we take Venezuela as an example, crypto is seen as a means of protection from the hyperinflation being experienced there. Following that logic, a hyperinflation environment could spur increased demand for BTC and as such push prices up.

Whatever Bitcoin’s price trajectory, be it up or down, as the Fed, BoE and even the RBA begin to hike interest rates, the coming months will demonstrate the true nature of BTC and whether it is or isn’t an inflation hedge.