It’s no news that the concept of inflation is more pronounced in the traditional fiat market. In most cases, it is regarded as a corrective measure, being one of its various advantages. However, it has had adverse effects on Ethereum and Bitcoin’s price in the crypto community.
Bitcoin and Ethereum are the two biggest cryptos in the crypto space, and the reason is that over time, they have been able to build their user adoption rate with numerous investors buying and selling both cryptos.
Bitcoin aims at being the future of money, replacing the traditional fiat, while Ethereum is an altcoin with the capacity to house decentralized applications. However, these two have experienced a slight change in price due to the sharp increase in inflation last December.
The Inflation Jump
At the end of 2024, inflation reached its highest level in 40 years, a troubling advancement for President Biden and economic legislators as rapid price increases erode consumer sentiment and cast a cloud of uncertainty over the economy’s future.
The Consumer Price Index increased 7% year on year through December, and 5.5 percent when unstable prices such as food and fuel are excluded. The very last time a major inflation index exceeded 7% was in 1982.
Policymakers have been waiting for months for inflation to subside, hoping that supply chain issues will ease, and companies will be able to keep up with thriving customer demands.
Instead, ongoing coronavirus outbreaks have shut down industries, and delivery companies have struggled to clear long backlogs as consumers continue to purchase foreign goods at a rapid pace. Forecasters expect price gains to slow this year, but how quickly is unknown, posing a major economic policy challenge for President Biden and the Reserve Bank.
How does this affect cryptocurrency?
One of the main reasons investors trade Bitcoin mostly is its resistance to the concept of inflation, unlike fiat. So, irrespective of whatever happens in the traditional market, the crypto space seems less concerned because of the constant growth in adoption. Recall that the crypto community is highly volatile with no central authority.
Bitcoin and other cryptos also experience falls and ups, but it’s due to price volatility and not inflation. You can buy and sell Bitcoin from Evonax alongside other cryptos whenever you want to with little or no stress regarding inflation.
In December, the monthly inflation rate was a little dramatic in the United States to about 0.5%, with an annual inflation rate of about 7%. Bitcoin and other cryptocurrencies enjoyed some percentage increase in their prices. Bitcoin added about 5% to its daily gains and Ethereum about 8%, totaling $500 higher for Bitcoin and Ethereum, surpassing the $3,300 point.
Because of this inflation rate, several crypto analysts believe a massive selloff is imminent if it keeps going higher. There have been several considerations regarding the increase in CPI, giving inflation a huge ground in affecting these two crypto giants. Currently, the prices of both cryptos are very much below their price before the price jump.
So, it’s safe to assume that the last inflation is now affecting the prices of these cryptos. Could this be a call to a massive selloff? Or is it just a minor correction for the % increase during the last US inflation jump? More than anything, you might want to make your technical analysis to be sure if it’s the right time to buy and sell Bitcoin and Ethereum or you wait a little more.
Why are the prices of Ethereum and Bitcoin dropping? Is Bitcoin a true “inflation hedge”?
I’d ask this question over and over again if I were new into the crypto space too. The popular belief was that Bitcoin is an inflation hedge. However, as it stands, it seems that’s not the case. The entire crypto community was believed to be an inflation hedge, “inflation doesn’t have a say here.” From the looks of the Bitcoin and Ethereum price chart, it looks like they are both subject to the influence of inflation; if not, why are the prices reducing after the inflation jump? Is the massive selloff happening?
Recall that gold during the inflation saw a noticeable price increase, however slight increase, the same with gold futures. Bitcoin has been down more than 30% since the past few weeks, negating the popular assumption that Bitcoin is an inflation hedge. So, is Bitcoin and Ethereum truly where to invest if fiat is being dramatic due to inflation? One aspect of Bitcoin being an inflation hedge is that it’s an assumption that could push Bitcoin into being more mainstream.
So, with this, it might become accurate later in the future when the adoption has increased. So, when the price drops, other investors would be there to buy in on the lows, and Bitcoin’s price pumps up again. Since Bitcoin has a large dominance over the entire crypto market, it automatically affects other altcoins and cryptos.
Currently, it’s impossible to say that the last inflation is the cause of the dip in the crypto space, although it could be possible. The crypto community seems not to have a relationship with inflation, since several factors other than inflation could be responsible for this price instability.
These factors are such that could cause a massive selloff starting from Bitcoin. And as mentioned earlier, whatever happens on the Bitcoin blockchain seems to directly impact other cryptocurrencies. That remains one of the unpleasant aspects of cryptocurrency. Nonetheless, it is worth noting that the crypto community is affected by inflation based on assumptions with no solid evidence to back these claims.
In Conclusion
Cryptocurrencies aspire to be “digital gold,” which implies that they can be used as an inflation hedge. The push for more money to circulate in the economy to drive sales has made products more expensive in the United States and other markets around the world. So, it’s important to keep track of the changes in the economy if you want to invest in crypto.
