12 Dec 2021 · 7 min read

How Global Economy Might Affect Bitcoin, Ethereum, and Crypto in 2022

Source: Adobe/Travel mania

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  • Cryptoassets will benefit more from inflation than other assets.
  • However, some economists expect to see inflation cooling off in 2022.
  • Rising rates are not good for risk assets in general, and this may also include crypto.
  • Declining bond yields may make cryptoassets more attractive in the long run next year.

The crypto market has had one of its best years on record, and it largely has the global macroeconomic environment to thank for this. With inflation rising and interest rates historically low, those of us fortunate enough to have savings have looked for somewhere more profitable than a bank account to keep them.

At the same time, institutional investors have also been led by the same basic motivations to convert portions of their portfolios into cryptoassets, another big reason why we saw numerous all-time highs over the course of 2021. However, for 2022, economists and analysts say that we may see inflationary fears receding as the global economy stabilizes.

Analysts also expect to see rising interest rates at some point next year, a factor which may depress -- at least to a degree -- investor appetite for more speculative assets such as bitcoin (BTC) and other cryptoassets. However, some analysts estimate that rate rises won’t be very large, and that the wider appetite for crypto may be only slightly affected.

Inflation worries may subside sooner or later

Annual consumer prices inflation reached 6.2% in October in the United States, the highest rate for 30 years. Taken together with the fact that the Federal Reserve interest rate is effectively 0%, this means people in the United States -- as we also see elsewhere -- are effectively being subjected to negative interest rates.

Dollars (and euros, pounds, etc.) have therefore been losing their purchasing power, so anyone with extra cash at hand has been looking to convert it into something more value-preserving. This is basically what analysts speaking with Cryptonews.com predicted last year for 2021, and it accounts for much of the heat we’ve observed in crypto markets this year.

“I see inflationary pressures continuing into 2022. 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,” said Pete Earle, an economist with the American Institute for Economic Research.

Earle suggests that cryptoassets will benefit more from inflation than other assets, if only because they’re more easily accessed by the public. That said, some economists expect to see inflation cooling off in 2022.

“I don’t think the economic recovery is that strong to cause price pressures to continue rising in 2022,” said Fawad Razaqzada, an analyst at ThinkMarkets.

For Razaqzada, a chief driver of declining inflation will be oil prices, which tend to be correlated with macroeconomic cycles.

“I reckon oil prices will head back lower as supply increases from both the OPEC+ group and producers elsewhere, including the US. The potential return of Iranian oil supply could further weigh on crude prices,” he told Cryptonews.com.

Meanwhile, the impact of temporary factors and supply issues that have raised prices (as the world has emerged from the coronavirus pandemic) are also likely to wane, Razaqzada adds.

Bloomberg Intelligence analyst Mike McGlone also suspects that inflation will calm down soon enough.

“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,” he told Cryptonews.com.

While few analysts estimate that inflation will be seriously bad next year, some say we could still continue to see a mixed picture, with conflicting forces affecting the overall outlook.

“On one hand, we have global supply chain problems causing rising prices and tight employment conditions leading to wage rises. On the other hand, we have the longer-term disinflationary impact of improvements in technology [...] and there's also the demographic impact of an ageing population, which will depress prices too,” said Glen Goodman, the author of The Crypto Trader.

Despite acknowledging that things will be mixed, Goodman tells Cryptonews.com that he remains “very worried” about inflation over the coming years, and particularly worried that central banks “won't tackle it effectively.”

However, even if inflation doesn’t end up being seriously bad in 2022, some observers say that bitcoin’s status as a hedge will continue to be cemented next year.

“I see cryptoassets, notably Bitcoin, less as an inflation hedge now, but on the way to getting there. Bitcoin is in the price discovery stage towards attaining the status of global digital collateral in a world going digital,” said Mike McGlone.

Interest rates = going back up?

Fawad Razaqzada notes that, if we assume that at least part of the reason behind the 2021 crypto rally has been for inflation-hedging purposes, then this source of influence will no longer be there to support prices in 2022. Likewise, we may also see interest rates increase in such a way as to make cryptoassets a little bit less attractive.

“If inflation turns out to be hotter and stickier than expected, then surely the major central banks will have to tighten their belts more aggressively in 2022. Rising rates are not good for risk assets in general, and this may also include crypto,” said Razaqzada.

Mike McGlone also expects interest rates to rise to some degree in 2022, although the effect on the crypto market may once again be mixed.

“Central banks will try to wean off QE [quantitive easing] and low rates, until the stock market wobbles or actually drops around 10% and stays down awhile, and prospects of tapering or tightening will be gone, in my view. This is not profound, it's been the enduring trend,” he said.

At the same time, McGlone suspects that a falling stock market -- caused in part by a rate hike -- may result in US bond yields turning negative. 

“This is good for bitcoin and ethereum, but extreme speculative excesses should be a headwind for the broader crypto market. Bitcoin is likely to decline initially, if the stock market does, but I see the top three Crypto Musketeers (bitcoin, ethereum and crypto dollars) coming out ahead,” he explained.

It’s worth pointing out that the Bank of England defied expectations at the start of November and kept the UK’s base rate where it was, at 0.1%. This was largely for fear of suppressing the economic recovery from the COVID-19 pandemic, and it’s a concern we may see next year, with other central banks averse to increasing rates too steeply.

“I expect central banks will eventually raise interest rates, but it'll probably be too little, too late. That situation may be positive for cryptocurrencies, as riskier assets tend to benefit from an inflationary, low-interest-rate environment,” said Glen Goodman.

Other macroeconomic factors

Inflation and interest rates tend to be the two big macroeconomic indicators for the growth of the crypto market. However, there are a few others, with growth (or not) in employment and the economy in general also worth watching.

“When the economy is doing well, and employment is high, individuals and institutions are more likely to invest in financial markets, including crypto, than during an economic downturn. Therefore, it is worth watching these macro trends in the months and years ahead if you are a long-term buy-and-hold type of investor,” said Fawad Razaqzada.

Mike McGlone also advises investors to watch the (US) stock market, while once again noting that declining bond yields may make cryptoassets more attractive in the long run next year.

He says, “A wobble in the US Stock market and potential for the stock market to start to underperform, should be quite ultimately bullish for bitcoin and to a lesser extent, ethereum [...] I see a primary potential macroeconomic development in 2022, US Bond yields resuming the enduring (almost 40yr) downtrend and bitcoin sustaining above USD 100,000.”
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