How Can Inflation Affect Cryptocurrencies like Bitcoin and Ethereum?

United States Dollar purchase power against BTC | Source: Google

Over the last 50 years, inflation has already reduced the value of the USD by 85%, which strengthened BTC’s narrative as an excellent alternative to fiat money. However, in November 2021, after making an all-time high of $69,000, bitcoin’s price began its downtrend. Around the same time, USD purchase power against BTC started to rise, appreciating in November-end 2021 and then again in March 2022.

Notably, USD’s purchase power against BTC has been in an uptrend for the most part of this year. The same puts bitcoin’s inflation hedge narrative at risk. Additionally, constant issues surrounding market volatility and the high price of a single BTC unit pose friction to investors, especially newcomers.

While investment alternatives like bitcoin mining-backed ETFs and BTC ETPs have offered decent exposure to investors of all sorts, the constant volatility continues to haunt BTC traders and investors and newcomers in the market.

Cryptocurrencies and inflation

For the most part of bitcoin’s existence, BTC prices haven’t reacted negatively to policy uncertainty shocks, partly consistent with the notion of Bitcoin’s independence from government authorities. However, amid largely bearish market conditions, socio-political issues have played a key role in establishing BTC’s price trajectory over the last two quarters.

Furthermore, BTC’s rising correlation with the two major indices—the S&P 500 and Nasdaq- could play a S&P 500 and Nasdaq could play spoilsport in the coin’s inflation hedge narrative as the market matures.

Bitcoin’s price was down 57.02% from its all-time high price of $69,000, which also hampered the top coin’s narrative as a store of value. At the time of writing, BTC traded at $29,504.67, close to the $30,000 psychological support/resistance level.

The coin has maintained a rangebound trajectory between the $31,500 and $28,380 mark since May 10.