Cryptocurrency traders have had a relatively flat week as Bitcoin and Ethereum traded sideways in spite of inflation unexpectedly rising to 3.2 percent in July. The latest figures from the National Bureau of Statistics point to a surge in prices, and this has left investors uncertain as to what the future holds for the two leading digital currencies. Despite this, the prices of both Bitcoin and Ethereum have been relatively stable for the past week.
- 1. Inflation Rate Jumps as Bitcoin and Ethereum Trade Sideways
- 2. Bitcoin Trading Volume Increasing but No Significant Price Change
- 3. Ethereum Market Capitalization Sees Modest Growth
- 4. What Impact Could Higher Inflation Rates Have on Cryptocurrencies?
1. Inflation Rate Jumps as Bitcoin and Ethereum Trade Sideways
The inflation rate of the US Dollar has jumped significantly this week, attributed mainly to the increasing prices of commodities such as grain and oil. This comes at a time when Bitcoin and Ethereum are trading largely sideways, with no major changes registered either way. The latest figures, announced by the Bureau of Economic Analysis, show the overall US inflation rate is now at 3.4%, the highest reading since October 2018.
What is Behind the Inflation Rate Spike? The steep climb in the inflation rate can be attributed to the rising prices of commodities such as grain and oil – commodities which are vital to the US economy. Grain prices have increased by 6.2% in the past year, with the cost of oil rising 8.2% over the same period. Economists suggest that the increasing global demand for these products is one factor behind their rising prices.
What Impact is the Rise in Inflation Having? The ever-increasing cost of goods and services as a result of inflation is already having an effect on the American economy. It is forcing many businesses to raise their prices, and consequently, the cost of living for consumers. This could reduce consumer spending, leading to a slowdown in the economy. Already, the rising cost of housing has become a concern for households.
What Does the Future Hold? For the moment, it seems that the inflation rate is on an upwards trend. Until the prices of key commodities settle down, increases in the cost of living could continue. In the short-term, Bitcoin and Ethereum are unlikely to be affected, as their prices remain mostly stable. However, if inflation continues to rise, this could have a longer-term impact on these popular cryptocurrencies.
2. Bitcoin Trading Volume Increasing but No Significant Price Change
The trading volume of Bitcoin is now surpassing its levels before the March 2020 crash, yet there is no significant price movement. According to data from market monitoring platform Skew, trading volume has climbed from $4-5 billion to $9-10 billion since April.
There are various explanations as to why the volume increased while price remains stagnant. One perspective is that traders are actively accumulating smaller amounts of Bitcoin, rather than one large trade pushing the price up. This could possibly signify that Bitcoin investors are more interested in capital preservation than high returns.
Reasons for this accumulation could be explained by several factors. First, the global pandemic has increased the popularity of decentralized digital currencies such as Bitcoin, which are not based on governments’ fiscal policies or subject to manipulation by financial institutions. Secondly, large investors have taken a larger interest, providing ample liquidity for traders to enter the market with volatility at historically low levels.
Finally, the upcoming halving in May is likely to be a contributing factor to the high trading volume, although it is unlikely to have a dramatic impact on the price. Analysts expect the halving to reduce block rewards by 50%, and slow down the rate at which new Bitcoin is created. This change will reduce the supply and could drive up prices in the medium term.
3. Ethereum Market Capitalization Sees Modest Growth
The Ethereum market capitalization saw a modest growth of around 0.1% to around 200 billion USD on Sunday. The increase comes after a drop the day before.
The level of 200 billion USD is still significantly below its record level of around 200.8 billion USD, which was seen earlier this month. Despite recent volatility in the crypto markets, Ethereum remains the second largest cryptocurrency by market cap.
As of Sunday evening, the price is up around 0.17% compared to the same time on Saturday afternoon. This modest growth could be attributed to the recent announcement by the Ethereum foundation of the launch of its new Eth2.0 testnet.
Furthermore, Ethereum’s growing popularity as a tool for decentralised applications, and the growth of decentralised finance (DeFi) platforms, is helping to ensure that it remains attractive to investors despite the recent volatility in the crypto markets.
- Ethereum market capitalization saw modest growth of around 0.1% to around 200 billion USD on Sunday.
- Ethereum is still significantly below its record level of around 200.8 billion USD, seen earlier this month.
- Price up around 0.17% compared to same time on Saturday afternoon, attributed to recent announcement by the Ethereum foundation of the launch of its new Eth2.0 testnet.
- Ethereum’s growing popularity as a tool for decentralised applications and the growth of DeFi platforms helping to keep it attractive to investors.
4. What Impact Could Higher Inflation Rates Have on Cryptocurrencies?
The Rise in Inflation Rates
Inflation is the gradual decrease in purchasing power of a currency over time. Recent developments have led to rising inflation rates around the world. Central banks, such as the U.S. Federal Reserve, are keeping a close eye on inflation and making adjustments to interest rates to keep it steady.
Will Higher Inflation Rates Impact Cryptocurrencies?
With global inflation on the rise, it’s likely to have an impact on cryptocurrencies as well. Cryptocurrencies, being digital assets, are not immune to the effects of an economy’s inflation rate. Let’s take a look at the possible effects:
- Increasing Demand: High inflation could drive more people to invest in cryptocurrencies. As inflation rises, the value of more traditional forms of money are likely to decrease, leading people to look for alternative investments with higher returns.
- Market Volatility: Inflation will undoubtedly cause market volatility, which could lead to increased speculation and manipulation of crypto prices. This could lead to sudden rises and falls in the value of cryptocurrencies.
- User Adoption: High inflation could also spur more people to use cryptocurrencies instead of their government-backed currencies. This could lead to an increase in user adoption for cryptocurrencies, including for day-to-day financial use.
- Security Risk: User adoption could also make cryptocurrencies more attractive to cybercriminals. An increased use of cryptocurrencies could draw in cyberattacks, which could be catastrophic for users who have their digital wallets compromised.
In conclusion, the effects of higher inflation rates on cryptocurrencies are still uncertain. The effects could be both positive and negative, and only time will tell what changes they could bring.
The news of the inflation rate rising to 3.2% in July has Bitcoin and Ethereum treading water. The digital asset market continues its debate of whether crypto is a store of value or a means of transactional payments, however, this 3.2% increase present the digital asset class with a benchmark to monitor future inflation rates and test its potential as a hedge against increasing inflation. Ultimately, only time will tell how effectively digital assets withstand inflationary pressures.