Grayscale, a leading digital asset management firm, has shared insights on the potential impact of current economic conditions on cryptocurrencies like Bitcoin. The company’s research director, Zach Pandl, suggests that while recent inflation figures may pose a short-term challenge for digital currencies, the enduring issue of inflation could actually bolster the crypto market in the long run.
Pandl points out that with the U.S. government’s continued high expenditure and the Federal Reserve’s inclination to maintain elevated interest rates, assets that serve as stores of value, such as Bitcoin, currently valued at around $70,276, are likely to remain in high demand.
Grayscale’s research head predicts that despite the Federal Reserve’s hands being tied regarding interest rate cuts due to the prevailing high core inflation, several factors could support the cryptocurrency market. These include the anticipated Bitcoin halving event on April 20, a surge in economic activity, and increasing trends in crypto adoption and tokenization.
Recent inflation data revealed a 0.4% increase for March on a month-to-month basis and a 3.5% rise year-over-year, which exceeded the projections of a 0.3% monthly and 3.4% annual increase forecasted by Dow Jones economists. This development has led to a general consensus aligning with Pandl’s view that the Federal Reserve may not be in a position to lower interest rates soon due to sustained inflation.
Greg Daco, the chief economist at Ernst & Young, echoed this sentiment in a discussion with Yahoo Finance, emphasizing the added pressure on policymakers to maintain a stringent monetary policy stance for an extended period.
Despite the immediate negative implications of a rise in real interest rates for cryptocurrencies, Pandl remains optimistic about the long-term demand for assets like Bitcoin that are considered stores of value. He notes that the 10-year real interest rate has seen a significant increase of 19% from the previous month, reaching 1.934 from February’s 1.616. This uptick may drive investors towards traditionally less volatile investments, such as bonds and term deposits.
Historical data from the Federal Reserve Bank of St. Louis indicates that Bitcoin’s value tends to correlate inversely with sharp increases in the 10-year real interest rate. For instance, when the rate jumped by 52.35% between December 2017 and January 2018, Bitcoin’s price concurrently fell by 28%.
Following the latest Consumer Price Index (CPI) release, Bitcoin’s value experienced a slight decline, reflecting investor caution. On April 10, Bitcoin’s price dipped by 2.5% to a daily low of $67,463 on the Coinbase exchange.
However, at the time of reporting, Bitcoin’s price has recovered to approximately $70,640, according to CoinMarketCap. Crypto analyst Matthew Hyland recently highlighted the formation of an ascending triangle pattern on Bitcoin’s price chart, indicating a new resistance level above $71,500 and a peak of $72,329 on April 8.
