My Take - Why Inflation Is The #1 Problem For Crypto In 2025

Lark Davis

Introduction to Inflation

Inflation is a key concept in economics that measures how much more expensive a set of goods and services has become over time. It affects everybody and is often referred to as the "invisible tax" or the "theft of your purchasing power."

How Inflation Works

  • The Consumer Price Index (CPI) is the most popular measure of inflation.
  • The Bureau of Labor Statistics (BLS) in the United States releases CPI data every month.
  • CPI measures the prices of a representative basket of goods and services, including food, beverages, housing, clothes, transport, and more.

Examples of Inflation

  • A gallon of gasoline cost $2.50 in 2015 and now costs around $3.50, a 40% increase over 10 years.
  • Prices of everyday items like orange juice and eggs have risen significantly.

Latest Inflation Numbers

  • Year-over-year CPI is 2.9%, which is in line with expectations.
  • Core CPI, excluding volatile food and energy prices, rose by 3.2% over the last 12 months.
  • Headline CPI increased by 0.4% in December, slightly higher than the expected 0.3%.

Impact of Inflation on Cryptocurrency

  • The Federal Reserve operates under a dual mandate: to promote maximum employment and maintain stable prices.
  • When inflation rises, the Fed considers adjusting interest rates to cool down the economy without causing recession or job losses.
  • The Fed's decisions directly affect risk assets like cryptocurrencies.
  • Low interest rates and high liquidity can lead to higher investment in riskier assets like Bitcoin.

Future Outlook

  • Inflation will remain a key driver of market sentiment in 2025.
  • The Fed has projected that inflation should be watched closely.
  • With a new administration that is pro-cryptocurrency and pro-business, there is potential for a weaker dollar and increased liquidity in the markets.
  • Energy prices may go down, and the Fed may cut rates further, which could positively impact cryptocurrencies.