Cryptos response to surging inflation and interest rates

You must have probably witnessed a downward crypto trend in April as both Bitcoin and Ethereum fell more than 10% from the beginning of the month. So what’s the reason for the dip?
Inflation, which has been weakening the purchasing power of the U.S. dollar for months, remains the main economic story. According to data released Tuesday, the Consumer Price Index (a proxy for inflation) rose 8.5% in March compared to the same month the previous year, a 40-year high. (Gas prices are included in the CPI, so some of the rise is due to the Ukraine conflict and disruptions in energy supplies.) As a response, later this month, the Federal Reserve is anticipated to increase another interest-rate hike by 0.5%.

• • Despite the recent inflation statistics, cryptocurrency and stock prices rose marginally following the news. Some investors may have already anticipated the hike in the interest rate, while others believe that the inflation rates are nearing their peak. If the inflation and interest rate surges further, then it will affect the investors substantially. Investors may be persuaded to sell risky assets like tech stocks and cryptocurrencies in exchange for a guaranteed return on their savings accounts.
  • Historically Bitcoin has had a very low correlation with traditional assets like stocks and bonds. It changed in recent months due to the increasing popularity of crypto as a multi-trillion-dollar asset class. Considering that cryptocurrencies are now owned by millions of people and many of the world’s most powerful institutions, it’s no surprise that the same macroeconomic dynamics that drive other major asset classes are also influencing crypto markets.
  • The U.S. and Europe may soon adopt crypto just as developing economies, if the purchasing power continues to slide due to inflation. As per a recent global study, nearly 60% of adults in Latin America and Africa (home to some of the world’s highest-inflation countries) believe cryptocurrency is “the future of money,” and 46% believe “cryptocurrencies are a smart strategy to protect against inflation.”
  • Wall Street is continuing to make cryptocurrency bets. In a new shareholder letter, Jamie Dimon, JPMorgan Chase CEO (a longtime skeptic of cryptocurrency), approved his bank to adopt crypto technology: Decentralized banking and blockchain are actual, cutting-edge technologies that may be used in public, private settings, with or without permission. JPMorgan Chase is on the cutting edge of this technology. David Rubenstein, co-founder of Carlyle Chase has changed his stance on crypto investment stating that younger people don’t believe the dollar, euro, or other currencies have much fundamental value and owing some cryptocurrency probably makes you feel better when you have something that isn’t under the jurisdiction of the government.

Speculative investment in crypto and other high risk assets might have slowed down due to rising interest and as the inflation is surging the value of dollar, euro and other fiat currencies are shrinking. So, what do you think will happen to cryptocurrency in the long run? As per one scenario investors would be enticed to abandon the crypto market as the interest rates surge. As per another scenario both retail and institutional investors are being attracted to cryptocurrency as an alternative to fiat currency. How does this play out? Only time will tell.