Sunday, 09 May 2021 05:08 GMT

What Rising Inflation Could Mean for Bitcoin and the US Dollar

(MENAFN - Promoliti Ltd)

Bitcoin has become a popular payment method in recent years. It was 2017 when the world’s largest cryptocurrency broke records and eliminated all barriers. Right now people who did not even know about the existence of Bitcoin are turning their attention to the digital asset, whose value has already surpassed $50,000.

There is often a comparison between Bitcoin and the USD in terms of their roles in the financial industry. At the same time, we should point out that both of these currencies react differently to inflation. The coronavirus pandemic changed almost everything since 2020 and boosted rising prices and economic crises in various countries. Let’s have a look at what the rising inflation could mean for BTC and the US dollar.

USD and inflation

The coronavirus pandemic affected massively the United States and its major currency. Inflation is considered to be one of the most important indicators of economic development. This term refers to a steady increase in the overall price of goods and services. Thus, after a certain period of time, for the same amount of money products can be purchased for less. Inflation can be called one of the most significant benchmarks in foreign exchange markets. Therefore, traders are watching its indicators especially closely - in particular when it comes to the USD. Forex trading is one of the most popular activities and there was a time when people did not even know about tools such as a Forex VPS for trading. Right now everything is different and inflation affects a lot of the process.

The main reason for inflation is considered to be an increase in the money supply. However, it is influenced by other factors - a sharp increase in demand for certain groups of goods with the same supply, the increase in the cost of resources, etc. With high inflation, central bank interest rates also rise, and it becomes less profitable to borrow long-term loans. It is difficult to plan the situation in advance in this case, so the national economy, business, and population suffer.

The impact of inflation on the exchange rate of USD could have a significant impact. First of all, the markets of state securities are actively reacting to it. Since interest rates on them are fixed, the decrease in the yield that inflation leads to can offset the benefit of investments in them. This influence is also transferred to the currency markets, which are closely related. The dumping of bonds leads to an increase in the money supply and a fall in the exchange rate of the relevant currency. At the same time, inflationary processes are not always unequivocally negative for the state. If we are talking about an export-oriented economy, the fall in the value of its currency will bring positive results to exporters. In this case, competitive demand for its goods on the international market increases. In the future, the economy is growing and its currency is strengthening.

As we can see, inflation seriously influences exchange rate fluctuations. Thus, the rate of growth of U.S. inflation is among the most important factors in predicting further changes in the dollar. Using relevant information, traders can make profitable trades for the long term.

Bitcoin is well-protected from inflation

Due to the soft monetary policy of the Fed, the ECB and other central banks, inflation of world currencies will accelerate in the coming years. Bitcoin is protected from inflation due to its technical features. Firstly in favor of the further growth of bitcoin, are the increases in money supply, which the world's central banks are not going to stop.

The next driver is the development of cryptocurrency-loyal legislation. The best option would be to recognize cryptocurrency as a fully-fledged means of payment. So far, bitcoin has this status only in Japan. The more countries follow suit, the better the exchange rate of the currency.

However, the loyalty of many governments to bitcoin is under great question. Many states are positive about digital money, but instead of uncontrolled and decentralized bitcoin prefer to develop national digital currencies. The Bank of Russia, as it is known, is considering the possibility of releasing a digital ruble. China is already testing the digital yuan, Sweden is testing the digital krone. It turns out that bitcoin has become an "undesirable" competitor for national currencies.

Its outdated technology will also play against bitcoin. Bitcoin is the first cryptocurrency, and this is its plus and minus. On the one hand, it has the largest capitalization, on the other hand- since the creation of BTC there are many technically better cryptocurrencies. Bitcoin works on the Proof-of-Work protocol, because of this, transactions occur slowly, and electricity for mining takes a lot.

As for the further dynamics of the main cryptocurrency, no one can give accurate forecasts. However, both the technical picture and the fundamental factors suggest that bitcoin will continue to grow and inflation is less likely to have a major impact on it.


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