An Insight into Inflation and How it Moves the Crypto Market
We are seeing inflation 💲 nowadays making everything more and more expensive - more than they have been! Of course, this is not the case for cryptocurrency which until very recently, was going in the complete opposite direction! Let's see why 🤔 in more detail.
Well, crypto experts and investors have publicized Bitcoin (the largest crypto by market cap, and the original) to be a ‘hedge against inflation’ 💸, because of its fixed limited supply of 21 million coins attributing to its scarcity as well as speculative nature; and in theory, Bitcoin’s value should be uncorrelated to the stock market.
However, cryptocurrencies have been tracking the stock market very closely as of late 👀, letting us know that it isn't as ‘untouchable’ as the early ‘Bitcoiners’ say. In May this year, we saw the untimely demise of the algorithmic stablecoin called TerraUSD 💥 which completely crashed, wiping out $400 billion in crypto market capitalization within days! And adding to the mix for the perfect storm, the timing of global macroeconomic factors such as impending rising inflation and recession fears, investors and traders were left to question how long-term inflation will affect their crypto portfolios. To get into more detail, let's first dissect what inflation is and how it affects the world in general before connecting the dots to crypto! 🔗
What Is Inflation?
Inflation simply measures how much more expensive goods & services 💰 have become over a period of time, usually on a year-on-year basis.
So, Inflation occurs when the price of goods & services rise and each unit of currency gets you less for your money, resulting in the purchasing power of that currency 📉 falling.
There are several factors that can cause inflation, such as: Demand-pull inflation - which is when demand for goods and services is greater than the economy's ability to meet those demands Cost-push inflation - the increase of prices when the cost of wages and materials goes up An Increase in money supply (aka money printing) Devaluation - which is a downward adjustment in a country's exchange rate, ending up in lower digits for a country's currency
What Is A Recession?
A recession is a country’s economic activity basically slowing down 🦥. A reduction in spending generally leads to a recession and these times could last for quite some time, therefore completely restricting the growth of an economy. Economic indicators 📊 like the GDP, corporate earnings, employment change, and more, tend to then fall.
🕵 This then creates a mess in the whole economy and to tackle this, economies react in many ways; one common way to do this is loosening their monetary policies by increasing the 💵 money supply! A recent example of a recession you may remember is when it hit globally in 2008!
Inflation & Bitcoin; What’s Their Connection? ‘Cryptopians’ believe that allowing the central banks and governments to carry influence on the economy tends to lead to disaster! Recent examples of this are the failing economies of Venezuela, Turkey, and Zimbabwe, which have created less than favorable outcomes 🤦 for their own economies.
Bitcoin is resistant 💪 to central banks and their governments because they are decentralized and cannot be tampered with! Also, Bitcoin’s minting process is governed by code that, unlike the Fed, can’t just mint as many Bitcoins as it wants to influence its economy. But is Bitcoin really a good hedge against inflation? 🤷♂️
Is Bitcoin Really A Hedge Against Inflation?
As the US Dollar has fallen 📉, Bitcoin has outrun its own value and proved its worth, especially to the early investors! But it is still a highly volatile asset 🥶. Especially as of the start of this year, Bitcoin has been correlated to the US stock market a lot, which performs well 🔺 when the economy is encouraging and slips down 🔻 when consumer spending drops in times of inflation.
When inflation had hit its 40-year highs back in December 2021, Bitcoin began to fall. Unfortunately, the question as to whether Bitcoin is a long-term hedge against inflation is tricky to answer, especially without the benefit of hindsight.
Crypto & Long-Term Inflation
Ultimately, crypto is still a very young asset 🐣 to know for sure how inflation will affect it in the long run and as such, it is impossible to call it a good hedge against inflation! There is a possibility that up until now, it has been coincidental 👀 that whenever the comparisons have been made, it only looked like a good inflation hedge at that time. Unfortunately, only time will be able to tell us this for certain!
It is also possible that Bitcoin has created a likeness as a ‘hedge’ since it was first launched, but that's only about 13 years of data (not long in comparison to other asset classes), of which has been during a time of historically low-interest rates. So it is impossible to tell if Bitcoin’s original narrative as a hedge against inflation will still remain moving forward, especially given how the markets and global macroeconomic factors have changed! 😨
If money-printing 💸 keeps happening like it's going out of fashion, then we should see Bitcoin hold its value more over time and turn out to truly be a hedge against inflation, but for now, it would be naive to say for sure!
How Did BTC React To The Fed’s Interest Rate Announcement
Looking back in the charts 📊, aggressive rate hikes like what we are currently seeing, especially as of late, will continue to bring further volatility ↕️ to Bitcoin and other crypto prices, especially in the short term!
As we have mentioned, stocks and crypto have been working in correlation 🤝 to each other, especially since the start of the year! Both have been moving together closely at times, and have struggled to gather any strong momentum this year as investors and traders are veering away from riskier assets due to the rising interest rates, surging inflation, and a potential recession.
🎙️ Breaking News as of writing: The Federal Reserve has just raised ⤴️ the interest rates by another 75 basis points (0.75%) for the second time in a row, continuing with the most aggressive hikes in 40 years. The rumours and weariness of a 100 basis points hike didn't play out, 😅 which is what many investors were concerned about and this resulted in significant gains.
🟢 Bitcoin is currently valued at just under $23,200 as of writing, increasing by a good 10% over the last 24 hours and recouped the total crypto market cap to over $1 trillion! However, Bitcoin and the rest of the crypto markets are still not out of the woods just yet, as the economy is of course still unstable 🙈 and the next few weeks will prove vital in defining the direction of the markets as a whole.
So Where To From Here For Crypto?
Whatever we are to see 🕵 in the coming days, weeks, and months from the Fed, corporate earnings reports, and other 📋 economic events and data, it shouldn't really change our approach to our long-term crypto strategies.
❗ This is just another reminder that crypto is volatile and can carry additional risk rather than the more traditional asset classes 💹, especially in these times of economic and geopolitical uncertainty. Even though we have seen quite some positive momentum in the last couple of weeks, the crypto markets are still a far cry away 😭 from last year’s all-time highs.
🗝️ As there is still so much uncertainty in the global economy, diversification in portfolios is key to keeping your investments as sound and risk-averse as possible. In fact, it is statistically proven that diversifying could fundamentally reduce your exposure to risk and it is also a good rule of thumb 👍 to make sure your financial bases are covered like your retirement account 👵 or emergency savings 🚨 before putting in any extra cash in riskier assets like crypto!
An Alternative Option to Crypto Rewards
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