Why is crypto down when inflation is up?

With the relentless march of inflation, the U.S. Federal Reserve and prominent central banks globally face a pivotal decision. Amid rising prices, these institutions may find themselves compelled to take drastic measures to rein in the inflationary tide.

A primary tool at their disposal is the adjustment of interest rates. In a bid to dampen the economic fervor that fuels inflation, the Fed and its counterparts could opt to hike interest rates, thereby increasing the cost of borrowing and potentially slowing down economic activity.

Alongside interest rate hikes, monetary policy tightening is another viable option. This may involve measures such as reducing the money supply in circulation or increasing the reserve requirements for banks, both of which aim to decrease the overall liquidity in the economy and, consequently, the velocity of money.

Such actions, though aimed at stabilizing prices, often have far-reaching implications. Asset classes across the board, including traditionally volatile investments like cryptocurrencies, could experience significant price movements in response to these monetary policy shifts.

Specifically, cryptocurrencies, which have garnered immense popularity in recent years, may not be immune to the repercussions of tighter monetary policies. As investors reassess their risk appetites and adjust their portfolios amidst an uncertain economic landscape, the prices of these digital assets could potentially plummet.