How inflation, interest rates and the stock market affect Bitcoin’s price

While there are crypto-specific factors that could strengthen Bitcoin, it is undeniable that prices are often influenced by macroeconomic and global events.

Sometimes the price of Bitcoin can suddenly jump or fall without any warning.

In most cases, this is due to macroeconomic and global events beyond BTC’s control, rather than sentiment directly related to the cryptocurrency itself.

Here we will examine data and developments that can have a major impact on the performance of the digital asset.

Inflation

Inflation has become a closely watched barometer of health in major economies after the cost of living in the US, UK and beyond rose to 40-year highs.

There has long been a 2% target set by organizations such as the Federal Reserve and the Bank of England for the Consumer Price Index, but this has become obsolete after the coronavirus pandemic.

In America, the CPI rose to a jaw-dropping 9.1% in June 2022, and in Britain double-digit highs of 11.1% were recorded in October of the same year. Central bankers in both countries have acknowledged that inflation is sticky and difficult to bring back under control.

Bitcoiners often like to call dollar and pound inflation an invisible thief because of how it erodes spending power, pointing to the fact that BTC has a fixed supply of 21 million coins.

Therefore, you might think that worse-than-expected CPI readings would be good news for the Bitcoin price and increase demand for this digital asset.

But often the opposite has proven to be true.

A classic example of this occurred in May 2024, when the CPI reached 3.4%; this figure was lower than analysts expected.

In the four hours after the data was released, Bitcoin rose from $62,650 to $65,000, a significant increase of 3.8%. Wall Street also rose to record highs.

Which brings us to the reason for this little rally.

Bitcoin in 24 hours on May 14-15 | Source: CoinMarketCap Interest rates

When Bitcoin, a cryptocurrency designed to protest how the 2007/08 global financial crisis was handled, was launched in January 2009, the Fed’s interest rate was at 0.25%, the lowest level seen at any point in the previous 40 years. years.

They remained there for about six years before starting to climb slightly as confidence in the recession’s return grew. Then the coronavirus pandemic emerged and rates dropped once again to 0.25%.

Critics say this has ushered in the era of free money, especially because it lowers the cost of borrowing. Consumers are incentivized to spend, especially given that the returns on their savings accounts will be modest, to say the least. But with inflation heating up at an alarming rate, central banks had to put on the brakes and quickly raise interest rates to 5.5%, a high not seen since 2001.

Unfortunately, high interest rates tend to be bad news for Bitcoin. This is because the appetite for risky assets has decreased as investors can earn quite healthy returns by parking their cash in savings accounts or bonds.

There has been a growing expectation for months that the Fed will finally start lowering interest rates, and analysts believe this could be a catalyst for Bitcoin. A note from Deutsche Bank strategists in March 2024 said:

“As Treasury yields fall, more investors will likely seek higher-yielding alternative assets. “This capital flow into non-traditional investment classes such as cryptocurrencies could further support the ongoing rise in digital currency prices.”

Marion Laboure and Cassidy Ainsworth-Grace Stock Exchange

At times there has been a close correlation between Bitcoin and flagship indices such as the S&P 500 or the tech-heavy Nasdaq 100.

And you could argue that this will get even closer now that exchange-traded funds based on BTC’s spot price operate in US markets, allowing institutional investors to gain exposure to the price swings of the flagship cryptocurrency without owning it directly.

When it comes to global events that can impact the value of Bitcoin, unrest in the Middle East has proven to have a dramatic impact on BTC several times in recent months.

Such a decline was seen in mid-April, when it was announced that Iran had launched a drone and missile attack on Israel. Bitcoin fell from $70,000 to $62,000 in a matter of hours as the market digested the news, but quickly recovered.

A few days later, another decline occurred as Israel retaliated amid fears that the existing conflict in the region could escalate further.

While there are certain factors that could boost Bitcoin (including halving excitement, news of nation-state adoption, or acceleration beyond psychologically important price points), it is undeniable that BTC’s fate may also depend on the dollar-based economy it is designed to deliver on. alternative.