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How can inflation affect cryptocurrencies like Bitcoin and Ethereum?

Purchasing Power of US Dollar vs BTC | Source: Google

In the last 50 years, inflation has already reduced the value of the USD by 85%, which has strengthened the narrative of BTC as a great alternative to fiat money. However, in November 2021, after the price of Bitcoin hit an all-time high of $69,000, its downtrend started. Around the same time, the purchasing power of USD against BTC started to increase, increasing in late November 2021 and then again in March 2022.

In particular, the purchasing power of USD versus BTC has been on an uptrend for most of this year. The same threatens Bitcoin’s inflation-hedge narrative. Additionally, constant issues related to market volatility and the high price of a single BTC unit are causing friction among investors, especially newbies.

While investment alternatives such as Bitcoin mining-backed ETFs and BTC ETPs have offered investors of all types reasonable exposure, constant volatility continues to dog BTC traders and investors and newcomers to the market.

Cryptocurrencies and Inflation

For most of Bitcoin’s existence, BTC prices have not reacted negatively to political uncertainty shocks, which is partly consistent with the notion of Bitcoin’s independence from government agencies. However, amid largely bearish market conditions, socio-political issues have played a key role in defining BTC’s price action over the past two quarters.

Additionally, BTC’s rising correlation with the two main indices — the S&P 500 and Nasdaq — could play an S&P 500 and Nasdaq could play killjoy in the coin’s inflation-hedge narrative as the market matures.

Bitcoin’s price fell 57.02% from its all-time high of $69,000, which also hampered the top coin’s narrative as a store of value. At the time of writing, BTC was trading at $29,504.67, near the $30,000 psychological support/resistance level.

The coin has maintained a range between the $31,500 and $28,380 levels since May 10th.

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