Rising inflation could dampen cryptocurrencies, analysts say
Last time prices moved so fast, Ronald Reagan was president, gasoline cost around $ 1,353 per gallon and there was no such thing as bitcoin.
But tempus fugit and, as cryptocurrencies become a factor in many people’s economies, the sector has had to contend with inflation, which rose to a new 40-year high last month, according to data from the Bureau of Labor Statistics.
“Bitcoin needs risk appetite”
The overall consumer price index for June was estimated to have risen 9.1% from last year, up from the 8.6% rate recorded in May and well ahead of the Wall Street consensus forecast of 8.8%.
The June reading was the fastest since December 1981.
Analysts seem to be divided on what this means for cryptocurrencies.
“A very hot inflation report could mean some problems for cryptocurrencies as the debate over even more aggressive Fed austerity will begin,” said Edward Moya, senior market analyst for America with Oanda. “Wall Street thought that an increase of 75 basis points would be the worst case scenario for the policy meeting in July, but now the argument can be made for an increase of full points.”
Moya said the risk of the Fed sending the economy into a recession is increasing, and there is bad news for risky assets, especially bitcoin.
“Bitcoin needs risk appetite to stabilize, and that will not happen if financial markets continue to price in more austerity measures from the Fed,” he said.
Bitcoin was up slightly to $ 19,839.10 at the last check on July 13, according to CoinGecko, while ether essentially flat to $ 1,090.21 as dogecoin at $ 0.060478.
“Sponges for excess liquidity”
Cryptocurrencies have been hit by a series of unfortunate events in recent months, with bitcoin down 71% from the November 10 all-time high of $ 69,044.77.
Frank Corva, senior analyst for digital assets at Finder, said that the KPI figures have an effect on people’s ability and desire to invest in crypto.
“The more expensive consumer goods become, the less disposable income people have to invest in risk assets such as crypto,” he said. “Digital assets are sponges for excess liquidity, and the Fed is currently pursuing quantitative easing efforts to extract liquidity from the system. And even while the Fed is doing so, CPI printing continues to rise.”
This means that the Fed withdraws money from the financial markets, and consumer goods become more expensive at the same time, Corva said, noting that “this is not good for crypto”.
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“As long as people are struggling to make ends meet,” he said, “they will not think about adding more risk and uncertainty to their lives by investing in an asset class like crypto, which is notoriously volatile.”
Corva said that the story that bitcoin is an inflation hedge is not often presented with the right nuance.
“Bitcoin is an inflation hedge when the M2 money supply – or currency held by non-bank audiences – is inflated, as it did in 2020 and 2021,” Corva said. “It is not an inflation hedge when the prices of consumer goods inflate.”
“No dump in Bitcoin”
If CPI prints continue to be high, he said, “you will probably continue to see relative stagnation in the crypto markets.”
Martin Hiesboeck, head of blockchain and crypto research at Uphold, said that inflation figures – which are also high in the UK and Europe – “do not come as a surprise.”
“The real question is not whether the retrospective CPI figures set the forward-looking uncertainty in the macroeconomic environment,” he said. “But especially the price of bitcoin has shown signs of becoming somewhat resistant to inflation funds in recent weeks, as it should be.”
An hour after the release of the CPI, Hiesboeck said, “we have not seen any massive bleeding in the market and no dumping in bitcoin, which leads us to believe that we may have reached a sustainable level from which bitcoin can bounce back significantly.”
“The times of greatest fear are often the best time to take courage,” he said.
Hong Fang, CEO of the cryptocurrency exchange Okcoin, was also optimistic about bitcoin.
‘The Silver Lining’
“Despite the price of bitcoin, the number of active bitcoin wallets holding 0.01 BTC or less is at an all-time high,” she said. “This not only indicates that the interest from retail investors is at an all-time high, it also shows a degree of price diagnosis given the market’s decline.”
“Inflation is likely to be an important, if not the biggest, factor that motivates more people to buy bitcoin,” she added.
Rapidly rising inflation can be economically devastating for consumers, Fang said, “and that makes the concept of bitcoin – a currency that no centralized government can print more of – more attractive than ever to the average person.”
“This is the first time in history that investors have an alternative to fiat,” Fang said. “While the Fed has flexed its power to print money, both retail and institutional investors have turned to crypto – especially stable coins and bitcoin – as an antidote.”
With no end to the rapid growth of inflation in sight, she said, “the advantage is that the people are slowly regaining economic autonomy and stability through crypto.”
