How Do Macroeconomic Events Affect Bitcoin

The economics of any currency will affect the direction of that currency. Be it fiat or digital cash, they are all subject to their respective economies. Bitcoin’s globalized and decentralized nature attracts the impact of global economic events. The events in nearly 99% of all countries affect how bitcoin performs. For example, the demand for BTC or any digital coin would rise in nations where their local fiat is highly volatile or has less value.  Besides, the process of wealth accumulation and growth of economies at scale would result in people allocating their portfolios to alternative assets. Investors’ affinity to risk also has an effect on how they treat Bitcoin, relative to traditional financial assets such as equities or bonds

Macroeconomics is interested in the performance of economies with indicators such as inflation, changes in economic output, regulation and fiscal policies, interest and foreign exchange rates, as well as the balance of payments.

A recently published analysis by the World Economic Forum for Digital Currency Governance, bitcoin and other digital currencies should have a regulated role in macroeconomics. This is because they are potential catalysts for financial stability, market incentives, innovation, equity and environmental sustainability. This consortium’s main impetus to conduct the analysis was the growing concern around crypto’s potential spillover impact on the general financial system. A situation resulting in the safeguarding of digital cash and regulation being a top agenda for the majority of governments. 

For example, the European Council’s approval of  MiCA (Markets in Crypto Assets) and the United State’s release of a series of statements and reports about the state of crypto up to 2022. 

Aggregate Demand Effect

The aggregate demand effect for BTC builds up and floats alongside national fiat currencies. If for example, purchasing an asset using bitcoin funds creates an aggregate demand effect. This is because bitcoin is added to the total market supply that’s already in circulation. However, this concept only holds when original bitcoin miners use their revenue to purchase economic products, as well as where those goods exceed the cost of mining.  When people exchange bitcoin for national fiats, the is no direct aggregate demand effect since the effect becomes a substitute effect.

Expansion and Recessions

When wealth is created and injected into the economy, a wealth effect takes place. This usually has a direct impact on the overall monetary system. When people create wealth through bitcoin, they inject the added value back into the ecosystem. This causes an upward positive impact on the bitcoin ecosystem. 

Global economic health is a big influencing factor in the price of a majority of assets, including bitcoin. In moments of economic expansion and prosperity, most individuals prefer to allocate their wealth to financial assets. The demand for such assets directly adds value to the prices. On the other hand, recession economic periods result in people liquidating their financial assets, hence lowering the demand for alternative assets such as bitcoin. 

Expansion and recession are macroeconomic events that inform investors on what assets to purchase. Such events shape the perspective and risk tolerance of asset investors.

Risk-On Vs. Risk-Off Conditions

Risk-on risk-off takes place when the price performance of an asset responds to changes in the risk tolerance of an investor. This directly affects investment activities and usually takes place relative to global economic patterns. Whenever the overall risk sentiment is low, investors will purchase higher-risk investment assets (Risk-On). However, when the overall risk sentiment is high, investors look towards low-risk investments (Risk-Off). 

An investor will be more willing to make a high-risk investment if its reward potential is higher during risk-on conditions. Such periods usually influence people to invest in equities. On the other hand, risk-pff conditions result in people investing in more predictable assets such as bonds and currencies. 

Bitcoin’s volatility and price appreciation during bull markets have attracted the attention of risk-on investors. However, this will not always be the case once bitcoin stabilizes its price and becomes a risk-off investment like gold and silver. Bitcoin and gold share similarities such as protection against inflation due to scarcity as well as acting as a store of wealth.

Weak Fiat Currencies

The majority of countries measure the value of goods and services through the local national currencies such as the Euro or Dollar. Whenever the national currency undergoes inflation, all products in the respective country demand more of that currency. Hence a rise in the cost of living. This effect causes a huge problem in any person’s purchasing power, especially if they are holding their wealth in an inflationary currency. 

All major economies use fiat currency. And all fiat currencies are prone to inflation. However, each individual country has their own distinct inflation rate. The key driver to any fiat’s inflation rate is the supply of that currency. More supply means less overall demand.  Bitcoin’s total supply is a hard cap of 21 million coins, which is known and predictable at the same time. This alone makes it deflationary (resistant to inflation). High inflation rates in Nigeria and turkey influenced a disproportionate demand for bitcoin in early 2021. 

Government Regulation

Government regulations affect the performance of bitcoin. While no government has any control of the bitcoin blockchain, laws and policies might influence people’s desire to buy or not buy a digital asset. For instance, Nigeria’s central bank banned bitcoin transactions resulting in Binance delisting the Naira from the exchange. This ultimately led to increased FUD in the country around digital currencies. However, such regulations might not manage to stop people from using digital assets. Such policies only make it difficult to use bitcoin but not impossible. 

Conversely, countries such as El-Salvador have cultivated a good relationship between bitcoin and the government. Even adopted it as a national currency.  Capital markets in both Canada and Brazil are also encouraging bitcoin investment by creating and approving a BTC exchange-traded fund (ETF). Furthermore, nations can easily encourage and motivate citizens to adopt and use Bitcoin by introducing favourable policies, taxation and regulation.

Bitcoin Mining Resources

Besides buying and selling bitcoin, the blockchain requires miners for it to be more secure and decentralized. However, miners need more energy and energy-intensive computing equipment. The availability of such equipment directly affects the bitcoin network’s hash rate. Thereby ultimately affecting Bitcoin’s transaction fees, decentralization, confirmation time and security. 

Xinjian, a region in china known for large bitcoin mining operations, had a power blackout. This resulted in pausing mining operations for a while causing high fees on bitcoin transactions for almost a week. The incident is said to have negatively impacted bitcoin’s price as well. 

Large tech companies that produce high-power computers and hardware influence the availability and affordability of bitcoin mining machinery. Besides, external demand for such products influences pricing for the same machinery. Think of external demand as other industries’ need for the same equipment, such as AI, FX rendering and cloud computing. Additionally, weather conditions also affect the simplicity of mining Bitcoin. 

The process of mining bitcoin produces significant heating on computers. The equipment will spoil in the absence of adequate cooling. Implementing cooling equipment increases the cost of running a mining firm, hence most of them prefer launching operations in regions with a cool climate. 

CPI – Inflation Marker

The consumer price index or the CPI is a quality metric for gauging the progress of inflation by measuring average change in prices on the basis of a basket that reflects household goods and services. 

Perpetual increase in inflation has an impact on the demand for bitcoin since consumers will now need to spend more compared to the previous time. 

Satoshi Nakamoto launched bitcoin amidst 2008’s global financial crisis, hence many people touted it as a hedge against inflation because of the fixed supply and scarcity. However, recent years have seen bitcoin and other cryptocurrencies perform in sync with traditional finance tech stocks. 

U.S Fed interest rate hike

The U.S. Fed raised interest rates by 75 basis points in June 2022. In 28 years, the interest rates have never been increased by such a rate. This event had an effect on the price of Bitcoin. 

Usually, interest hikes are a primary indicator for the U.S. Central Bank and the Federal Reserve to curb inflation and prevent economic slow-downs. 

An increase in interest rates leads to a high cost of borrowing and therefore discourages consumers from spending and lending. The impact can also cause downward pressure on Risk-On investment assets such as bitcoin. This is because investors can now earn a good wage by only saving their money in interest accounts, which is less risky. 

Final Remarks

Bitcoin has grown over the last decade and is becoming deeply entrenched in world economics. If the current trajectory is anything to go by, bitcoin and other digital assets will have a positive implication on global financial stability. This will also attract better regulation and the creation of more economic activities. Nonetheless, the price of bitcoin will always be dependent on whether most people desire to use it as a currency or not.

About the author

Skerdian Meta // Lead Analyst
Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.