Understanding How Global Macro Trends Like Inflation and Interest Rates Are Reshaping the Crypto Market in Real Time

Cryptocurrency market has been compared to a microcosm, existing outside the banks, governments and conventional finance. The reality is quite quite different. Bitcoin and Ethereum cryptocurrencies are closely linked to the events in the global economy. Macro trends like inflation, interest rates, and government policies have a large influence on the perceptions and utilization of crypto by investors. Indeed, the shift of crypto prices up and down in recent years can be frequently attributed to what central banks and governments do in reaction to the global economic issues.

First of all, we will consider inflation. Inflation occurs when the cost of goods and services continue to increase. This translates to food, transport, rent and almost everything to ordinary people is more expensive. As an investor, inflation means that cash will lose its value when it is simply stored in a bank account. When inflation is very high in a country, people tend to seek other alternative or safe assets as a way of safeguarding their savings. This is one of the reasons why Bitcoin is also referred to as digital gold. It is viewed by many investors as an inflation hedge, since the number of coins in circulation is fixed at 21 million. Bitcoin is not inflatable as opposed to fiat currencies that governments can print long as they wish.

The relationship is not so easy though. The 2021 and 2022 inflation around the world increased drastically following the COVID-19 pandemic, and people believed that crypto would increase as well. Initially, there was an upsurge in Bitcoin to new heights, but at a later point, it plunged as inflation made central banks raise interest rates. This demonstrates that it is not inflation that drives crypto prices. It is sensitive to other macro factors, on the one hand, to interest rates.

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Another effective factor is the interest rates. In times of high inflation, central banks such as the U.S Federal Reserve will increase their interest rates to decelerate the pace of spending and lower prices. However, as interest rates increase, it makes borrowing more expensive and safer investments such as government bonds begin to pay more. This renders risky assets such as crypto less desirable. That is what made both Bitcoin and Ethereum suffer at the time of aggressive interest rate increases in 2022 and 2023. Investors withdrew funds on crypto and invested in safer investments.

But conversely, in times of low interest rates, crypto tends to gain. Low yields and cheap borrowing in conventional markets stimulates investors to seek greater returns in riskier markets. It is one of the reasons why the bull market of 2020 and 2021 occurred - interest rates were close to zero, and central banks were flooding the economy with money. Much of that money got into crypto.

Real time effects of inflation and interest rates can be observed. Indeed, every time U.S. Federal Reserve makes an announcement of the interest rate determination, it immediately responds in crypto markets. When the fed indicates increased rates, the Bitcoin tends to go down. Bitcoin tends to soar when the Fed indicates a reduction in rates or loosening. It demonstrates to which extent macroeconomic signals impact the everyday life of the crypto industry.

In my case as a Nigerian, I also find out the impact local inflation and currency weakness have on the crypto adoption. There is a loss in the naira as well as a high rate of inflation. Most of the people surrounding me are moving to crypto, not just Bitcoin, but also stablecoins such as USDT, as a means of ensuring that their money is not devalued. This is yet another point of intersection of global and local inflation with the crypto market. As the U.S. and European policies define the big picture, local realities compel common people to use internet resources to find their shelter.

The way the global finance and crypto markets are converging is also worth mentioning. BlackRock and Fidelity, which are large asset managers, are going into crypto via Bitcoin ETFs and their decision-making is largely contingent on macro conditions. In case the interest rates remain high, institutions will be slower to invest large sums in crypto. However, with a decrease in the rates, we can witness tremendous inflows as crypto will be more appealing than bonds and savings accounts.

The potential that links macro trends to crypto generates both opportunities and threats as well. On the opportunity side, crypto is gaining status as being a part of the global financial system. This lends it legitimacy and increases its likelihood of growing in the long term. On the risk side, it will be no longer independent of crypto. Like stocks it will be up and down with the inflation figures, the employment news and the speeches of the central bank. To survive in the market, investors must know these signals.

To sum up, inflation and interest rates are not only abstract economic concepts, as they determine the crypto market on a daily basis. Cryptocurrencies tend to suffer when inflation is high and the central banks raise the rates. Crypto tends to increase when inflation goes down and interest rates are reduced. It indicates that every investor who invests in Bitcoin, Ethereum, and other coins should be able to notice the global macro trends rather than crypto news only. On a personal level, this has been a lesson to me that being knowledgeable about the policies of the central bank is as important as being knowledgeable about blockchain technology. The future of crypto will remain attached to the real world, and astute investors will forever have one eye on inflation, interest rates and global economic changes.