Current macro inflation trends are likely to affect bitcoin in this way

Bitcoin is currently struggling, trading in the red for almost 3 weeks into the new year. The price has fallen 11% over the past month, leading many experts to believe that the bears have taken control.

Source: Trade View

Much of the downtrend was prompted by renewed concerns about the Federal Reserve’s (Fed) monetary policy cuts and is currently being rattled by record-high inflation in the United States. In one report IntoTheBlock analyst Lucas Outumuro believes the ability to reduce the US dollar’s currency supply through quantitative tightening could spell disaster for Bitcoin.

Pervasive Fear

BTC is inherently seen as a hedge against inflation due to its limited supply. This has contributed the most to the crypto king’s recent rise amid rising inflation. The Fed also eased its hawkish stance in 2021 after the economic slump due to the quarantine and stimulus packages helped investors allocate capital to BTC.

However, as inflation fears continue to mount, this could be completely reversed.

Source: IntoTheBlock

Outumuro explained in his report that a similar trend in BTC’s price action occurred in 2018 as inflationary pressures and the money supply declined.

The correlation between the change in M1 currency supply and Bitcoin price has since risen, peaking at 0.77 in the report.

Source: IntoTheBlock

If the money supply falls in the future, as the Fed recently pointed out, the future prospects for Bitcoin could become progressively worse. This is because investors will once again shift their focus away from risky assets like cryptocurrencies and stocks.

The cops run away

This is evident in Bitcoin transaction stats as the cryptocurrency has seen total outflows totaling over $317 million over the past 4/5 weeks. Total Bitcoin assets under management hit a 3-month low of $35 billion last week coin shares.

The sell-off has seen asset prices fall almost 40% from their all-time highs reached in November. On the downside, experts are warning that certain macro factors will help sustain the downtrend.

Analyst Alex Krueger emphasize same thing recently on twitter:

“Furthermore, Bitcoin is now a macro asset, trading as a proxy for liquidity conditions. When liquidity drops, macro players sell bitcoin, all cryptocurrencies follow. (The correlation between falling crypto and bitcoin is unrealistic).”

A bear market in stocks can also be another indicator that the bears are winning. Especially since its growing correlation with Bitcoin is worrying the experts.

The International Monetary Fund recently issued similar warnings, arguing that spillovers could raise concerns about financial market stability.

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