Why is Inflation Affecting Bitcoin’s Price! Isn’t BTC Decentralized?

Why is Inflation Affecting Bitcoin’s Price! Isn’t BTC Decentralized?

The decentralized nature of Bitcoin is not stopping it from becoming an inflation hedge.

With the new consumer price index released by the US Bureau of Labour Statistics, inflation seems to be running high through the global market and amidst all this, Bitcoin is seen to play a see-saw game with gold with its continuous volatile up and down in price. 

Inflation and Crypto

Inflation is something 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. Because of its decentralized nature, people assumed that, unlike fiat currencies, cryptos can't be manipulated to the same extent by changing interest rates. But apparently, it is not true. In early May, Bitcoin (BTC) and ether (ETH) rallied on the news of interest hikes by FEDs, rising about 3.5% and 1.2%, respectively. Soaring inflation has been one driver of broad losses across the crypto markets. 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. While cryptocurrencies saw short-term price spikes after the news of the interest hike, the price gains couldn't sustain. Many analysts, however, still believe that cryptocurrencies have been behaving in line with equities, similar to a big tech stock.

Impact on Bitcoin

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.

Bitcoin as Inflation Hedge

Bitcoin has nonetheless been discussed as a potential "inflation hedge," a term used to describe commodities that may weather the economic downturn caused by inflation.  Part of Bitcoin's structure is that, unlike other forms of currency, it has a fixed supply of 21 million coins. High demand for it in this scenario would lead to increasing prices, promoting its use as a hedge against inflation.

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