What happens to the crypto market when the inflation hit a record high?

What happens to the crypto market when the inflation hit a record high?

In the old days, when inflation got hot, crypto was supposed to get hotter. And yet, as inflation has increased at the fastest pace in decades, crypto has been so volatile, this relationship has come into question. So, as inflation continues to rise, where do cryptocurrencies and inflation cross paths?

  • The constant inflation made financial markets negative. There are some predictions given the Fed will raise the interest rates to 0.75%.
  • Oil prices are predicted to continue rising and are unlikely to fall in the near future.
  • The world economic growth will hit the bottom in 2023.
  • Lots of news related to the legal issues for the crypto market are released by the legislators.

The United States Federal Reserve announced a 0.5% hike in interest rates, the highest hike ever in interest rates in the last two decades. Inflation is when the decreasing value of a currency, like the US dollar, increases the price of goods and services over time, thus helping the economy grow. Much of the recent inflation has been from pandemic-related quirks, like the rise in commodity prices, supply chain disruptions and labor force changes. However, unlike fiat currencies, cryptos can’t be manipulated to the same extent by changing interest rates, or so they said.

Based on the chart above, it can be seen that excluding energy and food, the inflation index tends to decrease. This shows that these are the two main indicators that push commodity prices to new highs.

Because this number is 0.3% larger than the number predicted by many experts (8.3%), financial markets immediately reacted negatively. In the US stock market, at the end of the session on June 10, the main indexes all dropped from 2.5% to 3.5%. Technology stocks continued to come under strong selling pressure as the NASDAQ posted the biggest drop of any major US market index.

Oil prices remain high as supply fails to keep up with demand due to economic sanctions on Russia. Besides, OPEC has not increased production until July, which is also a reason why oil prices continue to escalate.

Oil price in the period of 2021 - 2022 is assessed by Bloomberg experts to have many similarities compared to 2007 - 2009. However, the scenario in 2022 is completely different when oil price is not considered to drop sharply immediately but continue to be on the rise through 2023.

Currently, the energy prices are the main reason why inflation continues soaring. As a result, central banks will be under pressure to raise the interest rates even faster to contain the status quo.

Cryptocurrencies like bitcoin have often been called an excellent inflation hedge. However, USD’s purchase power against BTC has been in an uptrend for the most part of this year. Over the last two quarters, amid largely bearish market conditions, socio-political issues have played a key role in establishing BTC’s price trajectory.

Crypto’s big moves in a year like 2021 had some people feeling digital assets could serve the purpose to consistently outgrow the increase of inflation. A lot of investors already do this with gold, commodities and other investment asset classes. Instead of putting money in traditional and alternative investments to build and store wealth, an investor might purchase cryptocurrency in hopes it increases in value — making it less vulnerable to the fluctuations of the U.S. dollar.

Classic and better-understood inflation hedges (such as gold) haven’t worked well in this environment, either. Typically, when inflation increases, you would see the value of hedge investments increase as well. Yet it hasn’t been that simple in this current climate.  And unlike other instances of rising prices, inflation hasn’t dampened growth much, which is benefitting the U.S. dollar. With its stability, you may have more confidence in it retaining value versus its hedge investments, including cryptocurrencies.

Some investors are already using Bitcoin and other cryptocurrencies as a hedge against inflation. This could prove to be a savvy move, but that remains to be seen for now because it is such a youthful investment asset class. Its risk is less understood and more difficult to compare with other securities. Simply put, crypto’s past is too brief to predict its future performance. For now, cryptocurrency remains an unpredictable investment opportunity. If you own Bitcoin (or another crypto) as part of your diverse investment strategy, set specific performance goals for it. This will guide your actions when it crosses a specific price. That way, you’ll avoid emotional investing (trying to ride it to the top, for instance).

What should we pay attention to with the financial market in the near future?

  • The tight monetary policy from the Fed
  • Negative forecasts about economic growth
  • The impact on crypto from lawmakers
  • Crypto payment trend creates real market demand

References: Ally, Yahoo.