Markets
How inflation, interest rates and the stock market affect the price of Bitcoin
While there are cryptocurrency-specific factors that can boost Bitcoin, there is no denying that prices are often influenced by macroeconomic and global events.
Sometimes, Bitcoins the price may suddenly jump or fall without warning.
And in many cases, this is due to macroeconomic and global events outside of BTC’s control – rather than sentiments directly related to the cryptocurrency itself.
Here, we will explore the data and developments that could have an outsized influence on digital asset performance.
Inflation
After the cost of living in the US, UK and other countries reached 40-year highs, inflation has become a closely watched health barometer in major economies.
The tastes of Federal Reserve and the bank of england have a long-established target of 2% for the Consumer Price Index, but that went out the window in the wake of the coronavirus pandemic.
American CPI it reached an impressive 9.1% in June 2022 – and in Britain, double-digit highs of 11.1% were recorded in October of that year. Central bankers in both countries admitted that inflation has proven persistent and difficult to control.
Bitcoiners often like to refer to dollar and pound inflation as an invisible thief because of how it erodes purchasing power — and point to the fact that BTC has a fixed supply of 21 million coins.
For this reason, you might think that worse-than-expected CPI readings would serve as good news for the price of Bitcoin and increase demand for this digital asset.
But often, the opposite has proven to be true.
A classic example of this occurred in May 2024, when the CPI reached 3.4% – less than analysts expected.
In the four hours after the data was released, Bitcoin emerged from $62,650 to $65,000, a considerable increase of 3.8%. Wall Street also rose to all-time highs.
And that brings us to the reason for this little rally.
Bitcoin in 24 hours from May 14th to 15th | Source: CoinMarketCap
Interest rate
When Bitcoin was launched in January 2009 – a cryptocurrency that was designed as a protest against the way the 2007/08 global financial crisis was handled – the Fed’s interest rate was 0.25%, low levels that did not had been seen at any time in the last 40 years. years.
They remained in this position for about six years, before starting to rise slightly as confidence in recovery from the recession grew. Then the coronavirus pandemic happened and they were reduced to 0.25% once again.
Critics say this ushered in an era of free money – not least because it reduced the cost of borrowing. Consumers were encouraged to spend, especially considering that returns on savings accounts would have been tepid, to say the least. But as inflation rose at an alarming speed, central banks needed to hit the brakes and quickly raise interest rates to the current level of 5.5%, a high not seen since 2001.
Unfortunately, high interest rates tend to be bad news for Bitcoin. This happens because the appetite for riskier assets decreases, as investors can earn quite healthy returns on their money by depositing it in savings accounts or bonds.
For months and months now, there has been a growing expectation that the Fed will finally act to cut interest rates – and analysts believe this could be a catalyst for Bitcoin. In March 2024, a note from Deutsche Bank strategists said:
“More investors will likely look for higher-yielding alternative assets as Treasury yields decline. This flow of capital into non-traditional investment classes like cryptocurrencies could further support a continued recovery in digital currency prices.”
Marion Labouré and Cassidy Ainsworth-Grace
The stock market
At times, there has been a close correlation between Bitcoin and major indices such as the S&P 500 or the tech-heavy Nasdaq 100.
And you could argue that this will come even closer now that exchange-traded funds based on the spot price of BTC are in operation in US markets – allowing institutional investors to gain exposure to the price fluctuations of the leading cryptocurrency without owning it. directly.
When it comes to global events that can influence the value of Bitcoin, unrest in the Middle East has proven to have a dramatic effect on BTC several times in recent months.
One such decline was observed in mid-April, when it was announced that Iran had launched a drone and missile attack against Israel. Bitcoin fell from $70,000 to $62,000 in a matter of hours as the market digested the news, but quickly recovered.
There was another drop a few days later, when Israel retaliated, amid fears that the ongoing conflict in the region could worsen.
While there are specific factors that could boost Bitcoin – including excitement around halvings, news of nation-state adoption, or acceleration beyond psychologically significant prices – there’s no denying that BTC’s fortunes could also depend on the dollar-based economy. that it was designed to offer. alternative to.