Does Inflation Determine The Price Of Bitcoins: What You Need To Know

2021 has seen a spike in Bitcoin trading. Unlike investing in traditional currencies, Bitcoin is not issued by the central bank or backed by any governmental organizations.

Therefore, the monetary policies and economic growth measurement that typically affect the price evaluation of the fiat currencies don’t affect Bitcoin.

So, if the price of Bitcoin is not affected by the traditional elements, what affects the price of Bitcoin? This is what we will discuss in this article.

Does Inflation Determine The Price Of Bitcoins?

Crypto investors often discuss Bitcoin being a hedge against inflation; why?

The argument starts with the fact that the process of central bank money printing will eventually lead to the decrease of the value of money over time. But, on the other hand, Bitcoin has no connection with limitless printing.

There are a total of almost 21 million Bitcoin that will end up in the market when the reward for Bitcoin Mining reaches Zero. This limited supply allows Bitcoin to resist inflation.

Initially, the concept was only in the papers, but it became a proven fact after the pandemic. When the pandemic hit the global finance market, the government hoped for an expansionary monetary policy, whereby central banks started printing money to make the market stable.

The crazy amount of money printed during the first twelve months of the pandemic increased the inflation rate. Despite the value of the currency depreciating, the price of Bitcoin keeps on rising, reaching an all-time high of more than $63,000.

This further solidifies the argument that inflation does not affect Bitcoin’s Prices.

What Affects Bitcoin’s Prices?

After our conclusion to the argument, one thing is certain: inflation plays no role in influencing Bitcoin’s prices. So then, what factors stimulate Bitcoin’s prices?

The answer may surprise the investors because of what’s not included: Bitcoin Mining.

1. Demand & Supply

Demand and Supply are one of the main factors that affect Bitcoin’s price. The higher the demand and the lower the supply, the higher the price.

As we have talked about earlier, unlike the unlimited supply of fiat currencies, Bitcoin is limited. Moreover, over time it gradually slows down. For this reason, there is a possibility that the demand for Bitcoin will increase in the future.

Of course, the demand of every Cryptocurrency will vary, but that will depend on several other macro factors.

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2. Power Of Media

Information regulation also affects Bitcoin’s price. The way the media writes about Cryptocurrencies largely affects the demand curve. If the media talks about the good aspects of Bitcoin, the demand rises, while bad news can cause panic, reducing Bitcoin’s price.

3. Financial Crisis

The economic situation of the countries also determines the price in that country. If the traditional financial system starts to collapse, people start looking for other assets to safeguard their money’s monetary value. Therefore, the crisis has a close relationship with the economic status of the nations.

4. Rules & Regulation

Another important factor that can be considered equivalent to the demand and supply is the rule and regulation of Bitcoin. Every nation has different rules and regulations that you need to fulfill while trading in Bitcoin or other Cryptocurrencies.

When the rules become quite restrictive to take the repression, the price of Bitcoin falls. But, on the other hand, if the rules are friendly to the industry, it acts as a catalyst for a strong price increase.

The Bottom Line

The factors we have talked about are just the most important ones. There are other factors as well which support the price fluctuation. Therefore, all the investors who are looking to invest in Cryptocurrencies must analyze all the factors. Knowing the factors will help you avoid unwanted risks and increase the chances of profit.

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