06:11 18.11.2022
ikrom Ergashev (Neironix)

BTC prices dropped 61% over the course of 2022. Has inflation got something to do with it? 

The investment world can be unpredictable, and even the best strategy, trading platform or market analysis cannot protect traders from unexpected events. 

While awaiting the end of the global health crisis, the world was shaken by new conflict, followed by an energy crisis and inflation. Has that got anything to do with the crypto winter throughout 2022, which led to a 61% drop in Bitcoin (BTC) prices

Keep on reading to find out!

Cryptocurrencies Over the Course of 2022

Though last year was a bullish one for many cryptocurrencies, the crypto winter of the first half of 2022 shocked investors. Currently trading under $19,000, Bitcoin is three times lower than its all-time high of over $68,000 last year. 

Here we should remind newbies that Bitcoin is the first digital currency, created by the mysterious figure Satoshi Nakamoto and launched in 2009. Bitcoin led to the creation of thousands of altcoins and tech innovations in the financial sector and beyond. In fact, the benefits blockchain technology comes with can improve numerous sectors, including medicine, education, and data management. Many even see decentralised finance as a path to potential financial freedom. 

“The world is gradually waking up to the fact that every form of money that exists at the moment, except blockchain-based Bitcoin and other altcoins, can be manipulated and weaponised by the political class and centralised institutions, especially during a crisis, to achieve their extreme totalitarianism and the people are opting out.” - Olawale Daniel

Though Bitcoin is highly popular, sometimes it can’t keep up with the crypto bears. That said, BTC is not the only asset experiencing ups and downs. Ethereum (ETH), the second largest coin after Bitcoin, is also down week after week. 

Yet, after the Merge, one of the most significant events for Ethereum and the crypto sector this year, many believe that market confidence will increase despite the crypto volatility, changing interest rates, and staggering inflation levels.  

Here we should explain that with Ethereum being the king of smart contracts, the Merge is an extraordinarily unique and rare event. The Merge is the savvy process in which Ethereum has finally moved from a PoW to a PoS consensus mechanism in order to operate in an energy-efficient way. Will that boost prices? Let’s wait and see!

Inflation and Cryptocurrency Trading

So is the inflation we are witnessing the main culprit globally for the crypto winter of 2022? First, let's explain what inflation is. Inflation indicates how the prices of goods increase in a given economy. Naturally, when prices increase, people buy less. 

Note that there are three main scenarios: demand-pull inflation (when the demand for services is higher than the production capacity or when there is an increase in the money supply); cost-push inflation (when costs increase way too much); built-in inflation (when people want higher wages to cover their increasing living costs).

With inflation rates rising uncontrollably across the globe, many fear that hyperinflation is just around the corner. Hyperinflation is when prices increase rapidly over a very short period of time. This phenomenon is often a result of war or social conflict. To provide an example, Ukraine might be facing hyperinflation, with the Ukrainian gross domestic product (GDP) about to fall by 50%

While a country's authority could cope with keeping inflation from growing into hyperinflation, now even big economies are struggling. In the US, for example, inflation rates are up to 8%

Thus, it's no surprise that inflation affects the investment sector and the cryptocurrency market, in particular. To understand that, let's explain here that one of the ways to fight inflation is the so-called contractionary monetary policy - when interest rates are increased to reduce the money supply. This way, credit gets more expensive and spendings decrease, which naturally slows any economic growth. 

So, what’s happening is that the US Federal Reserve is trying to overcome inflation by raising interest rates, which puts risk assets under pressure, as per Yahoo Finance. Why? Simply because by increasing interest rates, traditional assets like the US dollar become more attractive with higher yields. While the correlation between crypto and USD is still unclear, such links should not be ignored, and traders should keep an eye on different data, including the Dollar Index (DXY), the CoinDesk Market Index (CMI), the Purchasing Managers' Index (PMI), and more. 

Inflation and Traditional Assets

Inflation affects everything. As of 28 September 2022, it's not only crypto assets being affected by inflation. Data show a decline in traditional equities along with a drop in the Dow Jones Industrial Average (DJIA), Nasdaq Composite and S&P 500

Commodities, such as energy, crude oil and natural gas, have also dropped. Copper, which is an indicator of economic health, decreased. And believe it or not, despite being considered a safe haven, gold also fell 1.8%.

That's not all! Business activity is shrinking while unemployment is increasing. Interestingly, when it comes to the connection between inflation and unemployment, Johns Hopkins University economics professor Laurence Ball told Reuters, “If either the labour market doesn't behave, or (inflation) expectations don't behave, the small increase in unemployment the Fed projects won't be enough. Either inflation will stay substantially higher, or we will have higher unemployment and a substantial economic slowdown.” Will we beat inflation? Who knows?!

Trading Cryptocurrency in 2022

One thing is clear: the last couple of years have been turbulent for individuals, businesses and economies globally. While cryptocurrencies and blockchain technologies have proven their real-world value, we can't ignore the fact that their volatility is linked to events out of our control. 

Besides, investing is influenced by investors' risk attitude, so it's no surprise that with the increasing inflation rates and changing regulations, demand is lower. Note that the law of demand and supply applies to the crypto sector. If a coin's supply is low or if the demand for it is high, prices will jump. 

At the same time, many experts call the current crypto winter warm. Though BTC has dropped 61% over the course of 2022, many believe that the bulls will return. Some experts even say that now might be the right time to buy BTC, ETH, or any other asset. Buy low, sell high, right? 

If you also want to enter the cryptocurrency market now and purchase Bitcoin, we've got some good news. While success and profits are not guaranteed, today's digital solutions allow almost anyone to get started. Investors can choose from a variety of trading apps, brokers, and exchanges to help them execute trades. 

For example, Immediate Edge is one of the popular platforms that connects traders and brokers. Note that the platform acts as a marketing tool and automatically transfers users to reputable brokers. Some brokers offer automated software, trading signals, market data, copy trading, demo accounts, and a variety of assets, including crypto, forex, stocks, and commodities. 

Despite the large number of online tools users can use to tame the crypto market, we suggest consulting a licensed professional to help you limit poor financial decisions. 

Tips to Overcome Inflation and Tame the Crypto Market

But hey! Despite the economic situation that we are in, one can beat inflation on an individual level. 

  • Many experts say that traders should keep investing. Don’t fall victim to fear and emotions, and don’t be too quick to sell to avoid monetary loss. Remember that losses are a normal part of the financial world, and only by embracing risks, you can potentially win.
  • Experts agree on the benefits of portfolio diversification. Holding cash won't help you overcome the high inflation rates we are witnessing. Only by diversifying your portfolio, you can mitigate risks. Consider Bitcoin, Ethereum, Tether, Ripple, Cardano, Dogecoin or any other digital asset. Just remember one rule: invest only what you can afford to lose.

  • Experiment with opportunities! From finding opportunities for promotion to exploring new sectors, there are many ways to protect your wealth. Interestingly, Leandra Peters, Founder of Female in Finance LLC, told Forbes: “I'm doing this by continuing to invest in various low-cost index funds, but I'm contributing more to a different asset class: private real estate. Cash at this point is disappearing quicker than a Houdini magic trick, which is why I'm choosing to invest in assets that are gaining inherent value. Real estate is potentially one of the best ways to hedge against inflation as it has necessary value. Private real estate is expected to have strong returns in an environment where inflation is high.”

  • Review your budget. That’s right! When you can't increase your profits, you should cut your expenses. Review your long-term goals and cut on short-term spendings, such as grocery shopping, vacation, clothes, and leisure activities. Think of that as taking control of your finances, not a limitation!

Final Thoughts

It's clear that inflation is ruling the globe, even though governments are implementing different practices to reduce its detrimental effects. So has today's high inflation rates got something to do with the fact BTC prices dropped 61% over the course of 2022? The answer is… maybe. The truth is that the correlation between inflation and crypto is still unclear.

Nevertheless, many experts say this crypto winter is relatively warm and believe now it's the right time to enter the market. You can also join this world today!

Neironix is not responsible for the safety of your funds and does not provide investment advice.

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