The Influence of Inflation, Interest Rates, and the Stock Market on Bitcoin
Bitcoin’s price is often influenced by macroeconomic and global events, despite its crypto-specific factors. These events can cause sudden price fluctuations, unrelated to the cryptocurrency itself. Inflation is one such event that affects Bitcoin’s performance. After the COVID-19 pandemic, inflation reached record highs in major economies, eroding spending power. Bitcoin’s fixed supply of 21 million coins makes it an attractive alternative to inflationary currencies like the dollar and pound. However, worse-than-expected inflation readings do not always lead to an increase in Bitcoin’s price. In May 2024, when CPI was lower than expected, Bitcoin experienced a rally, suggesting that other factors were at play.
Interest rates also play a significant role in Bitcoin’s price. When Bitcoin was launched in 2009, the Fed’s interest rate was at a historic low of 0.25%. As confidence in the economy grew, interest rates began to rise. However, the pandemic caused interest rates to be slashed back to 0.25%. Lower interest rates incentivized consumer spending but also led to rapid inflation. To combat inflation, central banks raised interest rates to their current level of 5.5%. High interest rates are generally unfavorable for Bitcoin, as investors prefer safer assets that offer higher returns. However, there is speculation that the Fed may cut interest rates, which could positively impact Bitcoin’s price.
Bitcoin’s value is also influenced by the stock market. There have been instances where Bitcoin’s price correlated closely with flagship indices such as the S&P 500 and Nasdaq 100. The recent introduction of exchange-traded funds based on Bitcoin’s spot price in U.S. markets allows institutional investors to gain exposure to Bitcoin’s price fluctuations without directly owning it. Additionally, global events, particularly unrest in the Middle East, have had a significant impact on Bitcoin’s value. For example, when Iran launched an attack against Israel, Bitcoin experienced a temporary decline in price, but quickly rebounded.
While specific factors like halvings, nation-state adoption, and reaching significant price points can boost Bitcoin’s price, it is undeniable that its fortunes also depend on the dollar-based economy it aims to provide an alternative to. Bitcoin’s price is influenced by a complex interplay of macroeconomic and global events, making it a unique and dynamic asset.
