The crypto market has had one of its most successful years on record, thanks largely to the global macroeconomic environment. With inflation on the rise and interest rates at historic lows, those of us fortunate enough to have savings have looked for a more profitable place to keep them than a bank account.
At the same time, institutional investors have been compelled by the same fundamental motivations to convert portions of their portfolios to crypto assets, which is another major reason for the numerous all-time highs seen in 2021. However, economists and analysts predict that inflationary fears will fade as the global economy stabilizes.
Analysts also expect rising interest rates at some point next year, which could dampen investor appetite for more speculative assets like bitcoin (BTC) and other cryptoassets, at least to some extent. However, some analysts believe that rate hikes will be minor and that the overall appetite for crypto will be unaffected.
Worries about inflation may fade away sooner or later.
In October, annual consumer price inflation in the United States reached 6.2 percent, the highest level in 30 years. When combined with the fact that the Federal Reserve’s interest rate is effectively 0%, this means that people in the United States and elsewhere are effectively paying negative interest rates.
As a result, the purchasing power of dollars (and euros, pounds, and other currencies) has been eroding, and anyone with extra cash has been looking for ways to convert it into something more valuable. This is essentially what analysts speaking with Cryptonews.com predicted for 2021 last year, and it explains a lot of the volatility we’ve seen in the crypto markets this year.
“I believe inflationary pressures will persist through 2022.” “The genie isn’t so easily put back in the bottle,” said Pete Earle, an economist with the American Institute for Economic Research. “The knock-on effects of pandemic policies, fiscal largesse via stimulus checks, and a tremendously expansionist monetary policy are at work; the genie isn’t so easily put back in the bottle.”
Cryptoassets, according to Earle, will benefit more from inflation than other assets, if only because they are more accessible to the general public. However, some economists believe that inflation will begin to moderate in 2022.
“I don’t believe the economic recovery is strong enough to keep price pressures rising in 2022,” said Fawad Razaqzada, a ThinkMarkets analyst.
Oil prices tend to be correlated with macroeconomic cycles, will be a major driver of falling inflation, according to Razaqzada.
“I believe oil prices will fall as supply from the OPEC+ group and other producers, including the United States, rises. He told Cryptonews.com that the return of Iranian oil supply could put even more pressure on crude prices.
Meanwhile, the impact of temporary factors and supply issues that have pushed up prices (as the world recovers from the coronavirus pandemic) is expected to fade, according to Razaqzada.
Mike McGlone, a Bloomberg Intelligence analyst, believes that inflation will level off soon.
He told Cryptonews.com that “moribund gold and declining US Treasury bond yields are primary indicators that the 2021 inflation bounce is a blip within the predominant deflationary trends, notably on the back of rapidly advancing technology.”
While few analysts believe inflation will be particularly bad next year, others believe the picture will remain mixed, with competing forces influencing the overall outlook.
“On the one hand, we have global supply chain issues that are causing price increases, as well as tight labor market conditions that are leading to wage increases. On the other hand, improvements in technology have a longer-term deflationary effect […] and there’s also the demographic impact of an ageing population, which will depress prices,” said Glen Goodman, author of The Crypto Trader.
Despite acknowledging that things will be mixed, Goodman tells Cryptonews.com that he is “very concerned” about inflation in the coming years and that central banks “will not tackle it effectively.”
Even if inflation does not become a serious problem in 2022, some analysts believe bitcoin’s status as a hedge will be cemented next year.
“I see cryptoassets, particularly Bitcoin, as a means to an end rather than an end in themselves. Mike McGlone stated, “Bitcoin is in the price discovery stage of achieving the status of global digital collateral in a world going digital.”
Is it possible that interest rates will rise again?
If we assume that at least part of the reason for the 2021 crypto rally was to hedge against inflation, then this source of influence will no longer be there to support prices in 2022, according to Fawad Razaqzada. Interest rates may rise, making cryptoassets less appealing.
“If inflation turns out to be hotter and stickier than expected in 2022, the major central banks will almost certainly have to tighten their belts even tighter.” “Rising rates are bad for risk assets in general, and crypto is no exception,” Razaqzada said.
Interest rates are expected to rise to some extent in 2022, according to Mike McGlone, though the impact on the crypto market may be mixed once again.
“Central banks will try to wean off QE [quantitative easing] and low rates until the stock market wobbles or actually drops around 10% and stays down for an extended period of time, at which point the prospect of tapering or tightening will be gone, in my opinion.” “This isn’t a new trend; it’s been going on for a long time,” he said.
At the same time, McGlone believes that a falling stock market, fueled in part by a rate hike, could lead to negative US bond yields.
“While this is good for bitcoin and ethereum, the broader crypto market should be hampered by extreme speculative excesses.” If the stock market falls, bitcoin is likely to fall, but I believe the top three Crypto Musketeers (bitcoin, ethereum, and crypto dollars) will emerge victoriously,” he explained.
It’s worth noting that the Bank of England defied expectations by keeping the UK’s base rate at 0.1 percent at the start of November. This was primarily due to concerns about stifling the economic recovery following the COVID-19 pandemic, and it’s a concern we might see again next year, with other central banks wary of raising rates too quickly.
“I expect central banks to raise interest rates at some point, but it will most likely be too little, too late.” “An inflationary, low-interest-rate environment tends to benefit riskier assets, so this situation could be beneficial for cryptocurrencies,” said Glen Goodman.
Other macroeconomic considerations
The two most important macroeconomic indicators for the crypto market’s growth are inflation and interest rates. However, there are a few others to keep an eye on, including employment growth (or lack thereof) and the economy in general.
“When the economy is doing well, and employment is high, individuals and institutions are more likely to invest in financial markets, including cryptocurrency, than when the economy is in a slump.” If you’re a long-term buy-and-hold investor, it’s worth keeping an eye on these macro trends in the months and years ahead,” Fawad Razaqzada said.
Mike McGlone also suggests that investors keep an eye on the (US) stock market while noting that falling bond yields may make cryptoassets more appealing in the long run next year.
“A wobble in the US stock market, and the potential for the stock market to start underperforming, should be bullish for bitcoin and, to a lesser extent, ethereum,” he says. In 2022, I see a primary potential macroeconomic development: US bond yields resuming their long-term (nearly 40-year) downtrend, and bitcoin maintaining its price above $100,000.”
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