Why is the price of Bitcoin affected by US inflation?
Yesterday evening, the US one-year inflation rate for May was announced as 3.5%, which was expected to be 3.2% and the previous value was 3.2%. As soon as the inflation data was announced, the price of Bitcoin immediately adjusted from 63,000 to 60,700. Now, for US stocks and Bitcoin, rising inflation is bad news and falling inflation is good news.
Why is Bitcoin affected by the US inflation rate and various policies? I will explain it in plain language to avoid some newbies who have just entered the currency circle from not understanding. Now the volume of Bitcoin has made a qualitative leap from the past, and its market value has exceeded one trillion US dollars. As the market value continues to increase, it will be affected by the economic cycle more and more.
1. Let's first understand why the entire US stock market rises and why it falls from a long-term perspective?
The most intuitive reason why the US stock market rises is the inflow and outflow of money in the market. If money flows in, it will rise and if it flows out, it will fall.
2. What mainly controls the money in the global market?
The US dollar accounts for the largest proportion of global circulating money transactions, and the US dollar is mainly controlled by the Fed's interest rate hikes and cuts.
3. Why does the Fed raise and lower interest rates?
The purpose of the US interest rate hike and rate cut is to control the healthy operation of the economic cycle. When the economy is prosperous and inflation is too high, interest rates need to be raised slowly. When the economy shrinks or deflation occurs, interest rates need to be lowered slowly to promote the economy. Therefore, the global economy will be affected by the Fed's interest rate hike and rate cut.
Fed rate cut: bank loan interest rates are lowered, treasury bond interest rates are lowered, corporate loans increase, the number of employed people increases, and the amount of money circulating in the market increases... The final result is that the global economy is prosperous and there is more money in the market, and more money flows into the stock market, so the stock market will naturally rise and usher in a bull market.
Fed rate hike: bank loan interest rates increase, treasury bond interest rates increase, corporate loans decrease, the number of unemployed people increases, and the amount of money circulating in the market decreases (when bank and treasury bond interest rates increase, everyone will take money to deposit in banks or buy treasury bonds)... The final result is that there is less money in the global market, and when money flows out of the market, prices will naturally fall or go sideways (there is a high probability that there will be no bull market).
4. At which stage of interest rate hikes and rate cuts are we in now, and what is the relationship between interest rate hikes and rate cuts and inflation?
This economic cycle will start from July 27, 2023 when the Fed's interest rate is raised to a maximum of 5.Since 2015, the high interest rate of 5.5 has been maintained. The cycle of this interest rate hike is affected by the epidemic in 2021. The United States has printed too much money and inflation is serious, so it must be suppressed by raising interest rates. If inflation is well controlled, the Federal Reserve will start to cut interest rates soon, but now inflation is increasing instead of decreasing, so the interest rate cut is further postponed.
Yesterday's inflation data exceeded expectations and caused Bitcoin to fall because: the inflation rate increased -> the Fed's interest rate cut expectations were postponed -> the bull market cycle was delayed -> the price of Bitcoin fell. In addition, Bitcoin has risen for seven consecutive months before, and now it is the second month of the correction. It is very healthy to rise for seven months and then pull back for two or three months. No matter how Bitcoin fluctuates, hold your chips, and we will meet at the peak of the bull market. All opinions are personal opinions only and do not constitute any investment advice.
Hold BTC, ETH, BNB, and let time accompany us to slowly become rich.
