Bitcoin and Inflation: It’s complicated
Bitcoin and Inflation: It’s complicated
The world of finance was eagerly awaiting the publication of the latest inflation numbers in the US. Last Friday they were published and oh boy were they high. The consumer price index (CPI) for all items in the US rose 6.8% in the 12 months through November. This is the highest number in the last 40 years.
In the wake of the CPI numbers’ publication, Bitcoin immediately rose by about 2% only to erase the gains shortly after. Given the fact that Bitcoin is increasingly seen as an inflation hedge, it seemed only naturally that the cryptocurrency would rise in value. But why did it cede its gains so quickly?
Some crypto traders might have already anticipated that the high inflation rate will serve as an additional motivation for the US central bank to cut back on its monetary stimulus and accelerate its tapering strategy. Consequently, this would lower the liquidity and tighten the conditions in financial markets – a situation that is orthogonal to Bitcoin’s fiat-denominated price.
With its absolute digital scarcity built in, the crypto asset seems like the perfect inflation hedge. As time goes on, it is indeed not unlikely that Bitcoin will one day exhibit the characteristics of a well-working inflation hedge. Currently though, there is no denying the fact that Bitcoin is still a speculative asset that behoves to its own adoption cycle that seems to be far from finished. By comparing Bitcoin’s market cap to that of gold, the most established inflation of today, the crypto asset still has a 10x to go. Borrowing from the famous Bitcoin commentator Robert Breedlove we can say: Today, because of its volatility profile, Bitcoin is desired as one of the ultimate risk-on assets that will develop into the ultimate risk-off asset according to its fundamental value proposition.