The U.S. Personal Consumption Expenditure (PCE) Index, the Federal Reserve's preferred inflation indicator, rose 2.9% annually and 0.2% monthly last December. The so-called core PCE rose 0.1% monthly but fell 3.2% annually, meaning Bitcoin has an interesting year ahead.
Stock futures were slightly lower at the start of the US trading day, while cryptos and Bitcoin were largely flat. Ahead of the US inflation news, Bitcoin was trading at $41,122.08, declining slightly before recovering to $41,831.43 at press time.
Why US Inflation Matters for Bitcoin
PCE is still above the 2 percent target that the Federal Reserve uses as a benchmark for tightening effects. The central bank has raised the federal funds rate to 5.25-5.5% since March 2022, which has led to a significant cooling in prices in most sectors, except accommodation.
Annual US core PCE | Source: YCharts
People sell risky assets when they feel that the central bank could trigger a recession by tightening fiat monetary policy too aggressively. Investors then move to more stable investments such as government bonds, which are backed by the full trust of the government. If the bank starts cutting interest rates, the prices of risky assets like Bitcoin may rise as risk appetite increases.
Read more: 7 Ways to Handle Retirement as Inflation Rises
The U.S. Treasury plans to announce its 2024 borrowing plans on January 31, 2024. Higher government debt can signal that the government is willing to take more risks and reduce the attractiveness of government bonds, as higher debt increases the likelihood of default. As a result, some investors may choose Bitcoin.
Why people invest in Bitcoin
The approval of certain exchange-traded funds (ETFs) that directly track the price of Bitcoin means the asset has a chance of establishing itself as a mature investment vehicle. An ETF allows an investor to directly participate in BTC price changes without having to purchase Bitcoin directly.
Hector McNeil, co-founder of the first gold ETF, says a Bitcoin ETF vehicle will increase adoption. He compares it to how a gold ETF removed the hassle of digital asset management but encouraged more people to invest in the asset.
“ETFs have their greatest impact when they provide market access to asset classes that are difficult to trade. [ETFs] Democratize ownership. Having asset managers like BlackRock, Invesco and Fidelity is a huge stamp of approval.”
Read more: Bitcoin price prediction 2024/2025/2030
McNeil believes that BTC supply constraints will gradually drive the price higher. Even though Bitcoin is not used as a currency by most investors, it is still considered a store of value and has technological properties that make it well suited to function as a currency, he believes.
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