Inflation never mattered much to crypto … until about a year ago

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Inflation never mattered much to crypto … until about a year ago.

As UBS noted in its latest Crypto Keys note last week, forward-looking consumer price measures in the United States are among the most important correlations for digital assets today.

…. something that we first highlighted a month ago.

Sensitivity to actual data prints also increases accordingly …

… and as UBS notes, BTC, ETH and a range of more established tokens statistically filter on par with traditional instruments that are seen as winners or losers from classic inflation.

Co-movement is weaker for new coins like BNB as well as ADA, SOL, DOT and AVAX, which outperformed strongly in 2021, as well as meme games like DOGE. But for UBS, this sounds more encouraging than surprising as idiosyncratic factors have clearly dictated their action on prices.

But while inflation has clearly been the driver for major cryptocurrencies over the past year, the risk, according to UBS, is now that more powerful drivers will emerge to dislodge the status quo. Potential candidates could be things like stable coin regulation, stricter account exchange and registration requirements reducing activity in CeFi and DeFi, and new restrictions on banking participation, all of which could be short-term negatives affecting liquidity and market activity, but longer-term positives paving the way for institutional participation. While such things may seem specific to crypto, they reflect the conditions that govern the behavior of conventional inflation hedging instruments.

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