Opinion Tug-of-War between Bitcoin and Inflation

Tug-of-War between Bitcoin and Inflation

January 15, 2022

The interplay of inflation and cryptocurrencies is an old tale that often branches off into many different directions. That is also the reason why it is so hard to gauge its influence not just on the crypto field, but almost any other business domain, including those connected or rooted in pure finances. The Bureau of Labor Statistics recently published its Monthly Consumer Price Index or CPI for the previous period. That number, when it comes to the overall macroeconomic situation, is as good as many have hoped for. In December, the rate of inflation went down, leaving a rise during the same month to 0.5 percent. That is lower than November when the same rise was 0.8 percent. 

The main reason for the slowing down of the inflation rate was the overall drop in the energy prices last month in the US. More precisely, fuel oil that many households use for heating went down by nearly 2.5 percent in December. However, they are still exceedingly high and the numbers are still more than worrying. In fact, the annual rate of inflation in the country is 7 percent, which is the highest since 1982. However, this is not something that is automatically bad for the crypto market, yet it is neither good by default either. So, many are trying to figure out what is to be expected of the endless but unclear connection between the inflation rate and the cryptocurrency market movements not just in the US but across the world as well.

CPI Effect

The number of the new CPI report this time around had a direct and noticeable effect on the price of bitcoin. Quickly after these figures became known, the price of BTC token, which was in bearish sentiment for a prolonged period, jumped up by nearly two percent. It retreated somewhat after that, but the positive push was clearly visible. The CPI report also had an effect on the S&P 500 and DJIA (Dow Jones Industrial Average). However, these figures were a lot milder. 

At a first glance, these numbers completely corroborate the idea that bitcoin and crypto are a form of hedge against inflation. But, that is a simplistic outlook that simply fails to hold up in the modern financial realities. All of that once more ties into the problem of having an ever-stronger connection between the traditional stock market and the cryptocurrency markets. With it, the CPI effect is something that reverberates through both entities and moves them not into opposite directions, but in a more aligned manner. 

Trading Experience

Expectations play a huge role in the process of figuring out market movements and the direction they might take. That is what is also keeping hold of the stock market from suddenly crashing on the publishing of the CPI numbers. Instead, experienced traders who are professionals working in the same domain have been trying to figure out what the CPI numbers would be weeks before they came out. They were in turn trading beforehand using the same projections, doing it way ahead of any actual numbers coming out. 

At the same time, the FED already stated that it is planning to raise the interest rates, but also cut its bond balance sheet in 2022. This will tighten the supply of money and also in all likelihood hurt the stock price performances. That might in turn offer another hit to the crypto prices as well, showing just how big of a role does the trading experience of these professional stock market actors play in all of the movement of the prices. Here, no idea of a crypto hedge can find any relevant traction.

Expecting Expectations

The process of understanding how these expectations of big and established traders work is a key element of understanding the markets. These have been front and center in appraising stock performances for decades and are an integral part of projections for all publicity traded businesses. Too often, these projections seem like they have been pulled out of thin air. However, most of these come through consensus projections and will be easily found on things like Bloomberg terminals. But, when it comes to things like esports and crypto, old rules apply but work differently. 

Overall, inflation has less influence on crypto and bitcoin, as the fact that digital currencies are a hedge against inflation is still an arbitrary concept. Presently, after nearly two months in the downturn, bitcoin is up as many buyers are stepping it. These are purchases of an asset they see as affordable and thus want to buy the dip. However, they are clearly not hedging their assets into crypto to protect them from inflation. They are simply using a market opportunity. 

Unclear Influence 

In the short term, there is no doubt that inflation is somewhat guiding the behavior of investors. Volumes of BTC trading surged after the CPI figures came out. A lot of money was made in the short time span after these numbers appeared and began influencing the market. So, there is a connection between inflation and crypto markets. That point of contact might be unclear and shifting, but it is still there and many analysts believe that it is growing. In many ways, it is also a sign of a maturing market that encompasses more and more factors. 

Even now, many serious and professional traders are using inflation and expected inflation to guide their decisions. Many of them are regularly making money from the same connection, but this does not mean a classic notion of an inflation hedge. Here is where the real difficulty for regular traders lies. They need to understand the cause and effect of inflation through the markets but steer clear of thinking that high inflation means automatic high demand and rising prices of crypto. Instead, the expectations of inflation, like the inflation numbers themselves, have to come into a broader calculation. Without it, the presence of inflation means little to the actual trades and decisions in the crypto markets.