Once regarded as little more than a passing fad in the financial sector, cryptocurrency is now making major headway in the industry, catching the attention of governments and private institutions alike.
Investors more familiar with traditional investment methods may not be aware of how crypto coin prices can be seen as financial indicators rather than independent speculation operating at random. Although not a one-to-one relationship, changes in policies and behaviors centered on cryptocurrency can affect markets and vice versa.
Recent developments in exchange-traded funds (ETFs), the consumer price index (CPI), and risk management have altered the way institutions interact with cryptocurrency, giving investors new tools to help guide their investment decisions.
Cryptocurrency prices boomed when the Securities and Exchange Commission (SEC) approved the use of spot Bitcoin ETFs by several financial firms in 2024. Expecting the agency to approve spot ETF applications, prices for BTC rose by 61% in October of 2023.
These spot Bitcoin ETFs function similarly to mutual funds, but they trade on stock exchanges tracking Bitcoin. As such, investors buying into these ETFs do not own any Bitcoin themselves. While this does incur trading and management fees, “Investors can hold and track their Bitcoin ETF in the same brokerage account as their other investments.”
With cryptocurrency gaining traction with large financial institutions, many smaller businesses and retail investors have grown more comfortable with crypto as a novel investment class, raising both its demand and price.
As a refresher, CPI, or the consumer price index, is an economic tool that measures the changes in prices over time that consumers pay for goods and services. This tool generally serves as an indicator for inflation and informs monetary policy decisions as a result.
Cryptocurrency prices often correlate with CPI. “As US inflation hit multi-year highs in 2021 at the peak of the COVID pandemic, Bitcoin’s price also saw significant gains, supporting its narrative as an inflation hedge,” states a 2024 article with several examples supporting this notion, including the 2021 inflation surge.
However, it is key to understand that this relationship is not a perfect standard of measurement. In 2022, CPI grew while Bitcoin went on to decline as a result of increased interest rates as a response to inflation.
Several interactions with CPI can also influence cryptocurrency prices. For instance, a rise in CPI often indicates rising inflation, leading investors to look into decentralized assets like cryptocurrency to soften the impact of devalued fiat. Additionally, substantial changes in CPI sometimes signal economic uncertainty, influencing how traders interact with crypto both positively and negatively.
It is essential to recognize that the CPI does not always correlate with cryptocurrency prices. Since many factors influence crypto prices, CPI does not always accurately reflect these prices. Changes in CPI have appeared to influence them in the past, however.
Crypto is notorious for its volatility, a fact that continues to make investors wary of approaching it as a viable long-term asset. While the lack of predictability is understandably discouraging, if viewed as a feature rather than an unintended outcome, volatility can work in an investor’s favor when handled correctly.
It is important to note that volatility is not always bad for the market. Volatility goes in both directions, meaning it can open investors up to substantial gains and provide a useful source of liquidity.
In addition, given their decentralized nature, crypto markets can be interacted with at any time from around the globe, making them uniquely accessible. It is this accessibility that, at times, serves as cryptocurrency’s greatest strength. With no circuit breakers in place, the always-on, globally accessible nature of crypto markets often makes them the first source of liquidity for investors.
Accessibility proves even more useful when considering the possibility of outages. Online brokerages have suffered from problems like outages or required maintenance at inopportune times in the past. This leaves investors unable to make trades or access their portfolios. In the meantime, popular digital assets such as Bitcoin and Ethereum have rarely faced similar issues. They have maintained reliability even when other investment systems become inaccessible.
Although still undergoing development, cryptocurrency is seeing more popular use thanks to clearer legal regulations and increased institutional adoption. These changes have made crypto markets stronger and made more investors want to add digital assets like cryptocurrency to their portfolios.
It is important to understand that buying Bitcoin directly does not incur fees for trading or management. Investing in these ETFs also does not provide the investor with ownership of any Bitcoin.
By keeping track of ETFs, changes in CPI, and methods for navigating market volatility, investors can make more informed decisions concerning cryptocurrency and the ways markets respond to broader macroeconomic developments.
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