Bitcoin drops below $40,000 ahead of US inflation data
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Answer Bitcoin drops below $40,000 ahead of US inflation data
Bitcoin halted its rally Thursday, dropping 5% to $39,200, as traders took a cautious stance ahead of US inflation data expected to show a massive rise in consumer prices.
The decline of Bitcoin, in turn, affected the alternative digital currencies, which also decreased in prices to varying degrees.
US consumer prices are expected to rise 7.9% last month, their fastest pace in nearly forty years, according to the report. Reuters.
The trend of rising inflation has been negative for Bitcoin in recent months, due to its tendency to act as a risky asset.
For example, the price of Bitcoin dropped about 5% in response to the January inflation reading, which showed prices accelerating by 7.5%.
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Given that Bitcoin is acting as a leader in the cryptocurrency market, most of the major cryptocurrencies have also fallen behind.
Bitcoin and its correlation with the rest of the financial markets:
Despite recent data indicating that Bitcoin has moved somewhat away from the stock market, its decline today suggests that it is far from decoupling.
The price of bitcoin has fallen sharply compared to gold prices this year, leading many to question the viability of bitcoin as a way to hedge against inflation.
Bitcoin is down about 40% this year, and gold is up 10%.
Yesterday, Wednesday, the US government sent a positive signal to the cryptocurrency market with the possibility of crypto-friendly regulation following the publication of the executive order from President Biden.
Economic sanctions against Russia and inflation:
The latest sanctions against Russia over its invasion of Ukraine are likely to increase inflation this year.
Sanctions on Russian oil have pushed up energy prices, while disruptions in Ukrainian wheat exports will drive up food prices, both of which are major factors in inflation.
Rising food and energy prices will affect the ability of retailers to invest in cryptocurrencies, and in turn affect the outlook for Bitcoin this year.
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There is also speculation that increased costs could lead to a recession this year, as the environment will turn out to be very unfavorable for risk-driven assets.
Inflation leads to higher interest rates:
Inflation is a major factor that must be taken into account by the Federal Reserve in raising interest rates.
The central bank is set to raise interest rates next week, for the first time in more than two years, as it struggles to tackle the latest rate hike.
Read:Japanese government seeks to simplify taxes on digital currencies
This move will also be negative for Bitcoin, as it will reduce the amount of liquidity in the market.
Increased liquidity was a key factor in Bitcoin’s impressive rise in 2021, as ultra-low lending rates allowed traders to look for better returns in cryptocurrencies.
But the sharp rise in inflation, especially since the second half of 2021, has slowly undermined that rise.
The bottom line is that the coming days will be busy and impactful on the bitcoin price when the above data and accompanying decisions are published.
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