After falling in April, inflation picked up once more in May, potentially harming crypto markets that are still struggling from the Federal Reserve’s stricter monetary and fiscal policy.
The Consumer Price Index (CPI) increased by 8.6% in the year starting in May last year and ending in May 2022, the biggest 12-month gain since December 1981, according to the Labor statistics bureau.
Food, shelter, and fuel accounted for the highest monthly increases in the CPI, a market index that analyzes changes in a wide variety of products and services. Monthly, the energy index rose 3.9 percent after dropping in April. In May, the power index grew by 1.3 percent, suggesting that electricity prices have risen by 12 percent in the last year, raising the cost of Bitcoin mining.
Mining may become more costly and less lucrative as energy costs rise, according to Jason Schenker, senior economist of Prestige Economics. In terms of cryptocurrency in general, he doesn’t believe that people are flocking to much more defensive assets, which would not benefit crypto.
If the Fed continues to raise interest rates aggressively, investment banks may be enticed out of the crypto space in favor of less risky options such as treasuries and securities. The values of most virtual currencies would suffer if there was a selloff.
Crypto Market Drops
At the same time the Bureau of Labor Statistics report was released, the larger cryptocurrency market took a knock. As per CoinMarketCap, Bitcoin has dropped 4.2 percent, while Ethereum has dropped almost seven percent in the last 24 hours.
Other cryptocurrencies were impacted worse, notably Avalanche (down 10%), Solana (down nine percent), and Cardano (down nearly 11% in the last day).
We’ve already observed a slowdown in institutional investment, and this trend is expected to continue IntoTheBlock, a data science firm focusing on cryptocurrency markets, has a head of research named Lucas Outumuro. Bitcoin has not shown to be an efficient hedge against inflation as many had hoped, despite the fact that this was one of the primary narratives propelling it ahead last year. Today’s market action, however, shows Bitcoin falling much less than Nasdaq and S&P 500; if this pattern continues, institutions may reconsider its attitude.
Inflation is driving people to be more careful with their finances, particularly those with lower incomes who spend a larger amount of their budget on essentials such as food and housing. Budget cuts may have a negative impact on the demand for digital resources.
The Fed is treading carefully as it raises interest rates, making borrowing more costly in an effort to chill consumer consumption and the economic system. If they increase interest rates too quickly, the economy could enter a recession, and the current report provides them less breathing room.
Higher borrowing rates make it more expensive for most companies to expand, which has a significant influence on IT company growth. As per a report issued in April by Arcane Research, the value of Bitcoin has now become predominantly intertwined with the value of tech stocks listed on Wall Street. According to statistics provided by blockchain analytics firm Chainalysis, this tendency has maintained throughout June.
How External Factors Are Affecting Crypto
To sum things up, cryptocurrency is no longer a stand-alone phenomenon. It has been increasingly intertwined with the world as we know it as more and more countries and organizations begin to accept crypto as a legitimate form of currency. As such, established financial principles such as inflation and hikes in energy prices are all impacting the once solitary giant that was cryptocurrency.
Bitcoin miners – who account for a large portion of the total Bitcoin market capital – are being faced with hikes in energy prices alongside various fiscal regulations, which are severely affecting their profitability and efficiency. By connecting the dots, it becomes clear that various issues in the world, such as a possible recession and exorbitant energy price hikes, as a result of Russia’s endeavors have crept their way into the crypto space.
The Bottom Line
Various financial indicators and experts, along with evidence of major cryptocurrencies struggling to climb back to their former heights emphasize just how seriously crypto investors have to be about investing huge amounts of money, specifically those looking to hedge inflation.