According to recent data, global inflation is projected to decline to 6.8% toward the end of this year, which is a 1.9% decrease from 8.7% and a 0.2% downward revision from earlier predictions. This is also set to continue into 2024, with a 5.2% inflation rate projected and a market growth acceleration of 4.1%. While this doesn’t mean that we are out of the woods just yet, businesses around the world will be breathing a slight sigh of relief as the landscape begins to calm and flatten.

Another industry that may be breathing a sigh of relief is cryptocurrency. For those who buy crypto, they will know that Bitcoin was originally conceptualised as a counter-inflationary asset. Because it is not technically fiat currency, Bitcoin and other altcoins do not respond to inflationary pressures that fiat currency does. In the beginning, if the value of anyone’s fiat currency were to drop, then cryptocurrency was supposed to increase. 

But throughout the financial pressures of 2022/23, it hasn’t really felt like that. After the Terra and Tether debacle of 2022, cryptocurrencies across the board have been lingering in the doldrums, with Bitcoin hardly anywhere close to its $65,000 valuation of November 2021. As inflation has been growing higher, cryptocurrency has not exactly been responding positively. So is cryptocurrency more connected to fiat currency than was previously thought? And if so, will the news about inflation easing similarly pull crypto out of its current bear market? 

The Relationship Between Crypto And Inflation

As mentioned previously, cryptocurrency has long been seen as a counter-inflationary asset. This means that, as an investor's money drops, the value of their cryptocurrency should increase. With a weaker dollar, then, more people are expected to put their cash into BTC, XRP, or ETH, which should work to preserve their spending power. But this has not shown itself to be true. As inflation has hit a 40-year high in 2022, the crypto market has lost around two-thirds of its value. 

To understand why this is, it’s important to remember that the typical response to inflation is higher interest rates. This then works to reduce the demand for speculative investment assets as secure, debt-based securities become more valuable. By making liquidity more expensive, investor activity is always going to slow down, as investing in high-risk assets such as cryptocurrency is always less risky when in an era of high liquidity and interest rates. 

Of course, cryptocurrency isn’t exactly low risk at any time. The market is highly volatile, and there can be a number of reasons why prices might fall or rise. But for investors putting money into assets, it’s always easier to do so during a time of stability rather than risk redoubling losses during a recession.

So Can It Work The Other Way Around?

In answer to the question of crypto’s bear market and whether positive forecasts can pull it out, one would have to take the same stance. If global inflation does affect cryptocurrency, then it will do so both negatively and positively. As the world starts to find its feet again and the financial markets begin to stabilise, there is likely to be more investment in crypto, which will drive up the prices and perhaps even hit the peaks that the market experienced back in 2021. 

It’s important to note that crypto, as an asset class, does not have a trading history during periods of inflation, so this isn’t a prediction that is backed up by any data. But in this market, investor sentiment and projection can go a long way, and if you were to look at the patterns during global inflation, then it’s acceptable to visualise where crypto might go if it starts turning the other way. 

Not to mention, there are a number of reasons why cryptocurrency has been lingering in a bear market – both external and internal. As mentioned before, the Terra and Tether debacle in 2022 hit all cryptocurrencies, and the SEC case against XRP brought about uncomfortable discussions about regulation and the sale of digital assets. 

The de-pegging debacle is now ancient history. And Ripple ended the SEC case in favour, which not only bolstered the price of XRP, but the crypto market itself – BTC gained at least 20% last month, with ETH surging by 1.14% and SOL jumping by 17%. In this way, the potential end of the bear market would have to be attributed to several cases and incidences, with the positive outlook on inflation only one of them.

What Is The Future Like For Crypto?

Banks and governments around the world have been reasserting – and will continue to do so – that we are not out of the woods yet when it comes to inflation. But things are looking positive. When it comes to crypto, the media outlook is also strong, and with the Bitcoin halving event set to take place in 2024, a bull market run doesn’t seem to be too far away. 

As ever, for investors, it is important to look at all of the facts, analysis forecasts, and market projections and then make an educated decision. Even in a bull market, it is possible to take wrong turns, so investors will need to reexamine their strategies and ensure they are putting themselves in the right positions. The global financial situation is progressing positively, and the cryptocurrency market is, too, so it’s essential that investors follow the path and don't stray in their excitement.

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