Introduction

While there are plenty of factors specific to the crypto world that can jack up Bitcoin's price, we can't ignore how this digital currency often gets tossed around by broader economic events. Ever noticed how Bitcoin's value sometimes nosedives or skyrockets out of nowhere? Yeah, that's usually because of some macroeconomic or global event beyond Bitcoin's control—things that have nothing to do with Bitcoin itself. In this piece, we'll decode which bits of economic hocus-pocus have a knack for playing with BTC's performance.

Inflation

Inflation has recently become everyone's least favorite buzzword. After the cost of living in the U.S., U.K., and other places rocketed to heights not seen in 40 years, everyone's been watching inflation rates like hawks. Central banks, like the Federal Reserve and the Bank of England, used to aim for a cozy 2% inflation rate, but thanks to the coronavirus pandemic, that target has been more ignored than an annoying sales call. In June 2022, the American Consumer Price Index (CPI) went wild at 9.1%. Across the pond in Britain, inflation hit a jaw-dropping 11.1% in October the same year. Yep, you read that right—double digits!

Bitcoin fans love calling dollar and pound inflation an "invisible thief," because it eats away at your spending power. They argue that Bitcoin, with its fixed supply of 21 million coins, is a safe haven. So, you'd think sky-high CPI numbers would be a gold star for Bitcoin, right? Think again. Often, the opposite is true. Take May 2024, for instance: CPI came in at 3.4%—lower than expected. Bitcoin didn't shrug; it skyrocketed from $62,650 to $65,000 in just four hours. Wall Street partied too, hitting record highs.

So, what’s going on? Why doesn't inflation always push Bitcoin's price up? The relationship between inflation and Bitcoin is as complicated as putting together IKEA furniture without instructions. High inflation can lead to tighter monetary policies and higher interest rates, which we'll talk about next. Let's dive into why the dance between inflation and Bitcoin is so unpredictable and why, sometimes, less inflation is more Bitcoin gains.

Interest rates

When Bitcoin made its debut back in January 2009—right on the heels of the global financial crisis—the Federal Reserve's interest rate was sitting pretty at 0.25%. This was practically an invitation to a champagne party for anyone with a loan. Things stayed like that for about six years, providing a cushion for recovering economies. However, as the coronavirus pandemic swept across the globe, those rates plunged back to the floor at 0.25%, giving a big fat "thank you" to consumer spenders and borrowers everywhere.

But here's the kicker: with inflation busting through historical ceilings like a Kool-Aid Man, central banks had to flex their muscles. The Fed amped up the rates to 5.5%, a high we haven't seen since 2001. And you know what that means for Bitcoin? It's like handing out free concert tickets for a show no one wants to attend. Higher interest rates make investors turn their backs on riskier assets like Bitcoin in favor of traditional, safer bets like savings accounts and bonds.

However, there's an upside: analysts keep talking about the Fed eventually cutting interest rates. According to Deutsche Bank strategists Marion Laboure and Cassidy Ainsworth-Grace, when traditional asset returns start to look like your grandma's school report card, more investors might start eyeing higher-yielding alternatives like cryptocurrencies. "This flow of capital into nontraditional investment classes like cryptocurrencies could further support an ongoing rally in digital currency prices," they noted with a wink.

The stock market

There’s been times when Bitcoin and major indices like the S&P 500 or the tech-savvy Nasdaq 100 seem to be doing an awkward yet synchronized dance. This relationship might get even cozier now that we've got exchange-traded funds based on Bitcoin’s spot price operating in U.S. markets. This setup allows big-money institutional investors to dip their toes into Bitcoin’s tumultuous waters without actually having to hold any of the digital asset. Like a kid googling a scary movie plot but not daring to watch it.

Correlation with indices

What’s fascinating—or maybe terrifying, if you’re not into high-stakes— is how closely Bitcoin can mimic movements in the stock market. Just as you see the S&P 500 throwing a tantrum or Nasdaq 100 doing a quiet slide, Bitcoin tends to echo these dramatic developments. This correlation will likely deepen with more institutional involvement via these fancy ETFs, making BTC’s price fluctuations an even hotter topic at your next financial planning meeting.

Global events impact

Let’s talk about the wild card—global events. Geopolitical tensions, economic unrest, and tech advancements can all send Bitcoin prices swinging like a professional gymnast. Take, for example, that time in April when Iran launched a drone and missile attack against Israel: Bitcoin nosedived from $70,000 to $62,000 quicker than you can say “volatile.” Of course, it bounced back like a resilient athlete, only to take another dip when Israel retaliated shortly after. Events like these remind us that while Bitcoin may have been designed as an alternative to the traditional economy, it's still very much a product of it.

Let's also not forget the impact of halving events, nation-state adoption news, or even just hitting psychological milestones. All these crypto-specific drivers can influence Bitcoin, but they often get overshadowed by broader economic currents and global happenings. So, next time someone tells you Bitcoin and the traditional market are like oil and water, you might want to check their sources; they might just be dancing to the same economic drum.

How inflation, interest rates and the stock market affect Bitcoin’s price

While there are crypto-specific factors that can boost Bitcoin, there’s no denying that prices are often influenced by macroeconomic and global events. Sometimes, Bitcoin’s price can suddenly leap or plunge without warning. And in many cases, this is because of macroeconomic and global events outside of BTC’s control — rather than sentiment directly related to the cryptocurrency itself. Here, we’ll explore the data and developments that can have an outsized influence on the digital asset’s performance.

Inflation

After the cost of living in the U.S., U.K., and beyond surged to 40-year highs, inflation has become a closely watched barometer of health in major economies. The likes of the Federal Reserve and the Bank of England have a long-established target of 2% for the Consumer Price Index, but this went out the window after the coronavirus pandemic. American CPI spiked to a jaw-dropping 9.1% in June 2022 — and over in Britain, double-digit highs of 11.1% were recorded in October of that year. Central bankers in both nations have admitted inflation has proven sticky, and difficult to bring back under control.

Bitcoiners often like to refer to dollar and pound inflation as an invisible thief because of how it erodes spending power — and point to the fact that BTC has a fixed supply of 21 million coins. For that reason, you may think that worse-than-expected CPI readings would serve as good news for Bitcoin’s price, and increase demand for this digital asset. But a lot of the time, the opposite has proven to be true. A classic example of this came in May 2024, when CPI reached 3.4% — less than what analysts had been expecting. In the four hours after the data was released, Bitcoin surged from $62,650 to $65,000, a considerable uptick of 3.8%. Wall Street also ascended to record highs. And that brings us neatly on to the reason for this little rally.

Interest rates

When Bitcoin launched in January 2009 — a cryptocurrency that was designed as a protest to how the 2007/08 global financial crisis was handled — the Fed’s interest rate stood at 0.25%, lows that hadn’t been seen at any point in the previous 40 years. They stayed there for about six years, before beginning to climb slightly as confidence in the bounceback from the recession grew. Then the coronavirus pandemic happened, and they were slashed to 0.25% once again. Critics say this ushered in an era of free money — not least because it lowered the cost of borrowing. Consumers were incentivized to spend, especially considering the returns in savings accounts would have been tepid to say the least.

But as inflation grew red hot with alarming speed, central banks needed to slam on the brakes and hike interest rates quickly to their current level of 5.5%, a high not seen since 2001. Unfortunately, bumper interest rates tend to be bad news for Bitcoin. That’s because appetite dwindles for riskier assets, as investors can get pretty healthy returns on their cash by parking it in savings accounts or bonds. For months and months now, there has been a growing expectation that the Fed will finally move to cut interest rates — and analysts believe this could be a catalyst for Bitcoin. Back in March 2024, a note by Deutsche Bank strategists said: "More investors will likely seek out higher-yielding alternative assets as Treasury returns decline. This flow of capital into nontraditional investment classes like cryptocurrencies could further support an ongoing rally in digital currency prices."

The stock market

At times, there has been a close correlation between Bitcoin and flagship indices such as the S&P 500 or the tech-heavy Nasdaq 100. And you could argue that this will move even closer now exchange-traded funds based on BTC’s spot price are in operation on U.S. markets — allowing institutional investors to gain exposure to the flagship cryptocurrency’s price fluctuations without owning it directly.

When it comes to the global events that can influence Bitcoin’s value, unrest in the Middle East has proven to have a dramatic effect on BTC several times in recent months. One such decline was seen in the middle of April, when it was announced that Iran had launched a drone and missile attack against Israel. Bitcoin plunged from $70,000 to $62,000 in a matter of hours as the market digested the news, but rather quickly rebounded. There was another drop a few days later when Israel retaliated, amid fears that existing conflict in the region could widen. While there are specific factors that can boost Bitcoin — including excitement around halvings, news of nation-state adoption or accelerating beyond psychologically significant price points — there’s no denying that BTC’s fortunes can also hinge upon the dollar-based economy it was designed to offer an alternative to.