Inflationary winds around the world mark sea change for Bitcoin

Is the global economy now in uncharted territory vis-à-vis Bitcoin ( BTC ) and inflation? For most of the cryptocurrency’s short lifespa...


Is the global economy now in uncharted territory vis-à-vis Bitcoin (BTC) and inflation? For most of the cryptocurrency’s short lifespan, the economic environment has been generally favorable for growth with stable prices, but recently new warnings have been issued of an inflationary storm.

If so, what does this mean for Bitcoin, long promoted by supporters as an inflation hedge but not really tested that way since its inception in 2009? In other words, will millions of individuals and institutions flock to BTC as a safe haven – an alternative to gold or the US dollar?

Recent reports, such as 6.2% increase in October The United States’ Consumer Price Index (CPI) – a 30-year high – is sobering, although this recent increase in a single national economy may have more to do with continued grunts in the supply chain and pent-up consumer demand post-pandemic as any secular change in global markets.

“Yes he [i.e., inflation] is potentially a problem, ”Mauro Guillén, dean of Judge Business School at Cambridge University, told Cointelegraph. But, much of the danger of inflation is related to consumer expectations about the future. If they believe that the continued rise in prices is a lasting reality, they will buy items as soon as possible, anticipating higher prices.

“The fact that US consumers are delaying buying big ticket items due to inflation suggests that they think inflation will come down,” Guillén said, adding: “I am cautiously optimistic that this is temporary. “

Others are not so optimistic. “It is now clear that inflation is less transient than initially hoped,” Itay Goldstein, professor of finance at the Wharton School, told Cointelegraph. The world is grappling with imbalances between supply and demand in the wake of the pandemic, and monetary and fiscal stimulus related to COVID-19 are also reflected in recent inflation reports, but “It seems that inflation has moved deeper and will take longer to subside,” he said.

A global phenomenon?

“Inflation has accelerated, and not just in the United States,” Marc Chandler, managing director of Bannockburn Global Forex, told Cointelegraph. Last week, “we also learned that China’s CPI fell from 0.7% year-on-year to 1.5%.” Will it last? It is not clear at this point. “What we do know is that the price pressures have not peaked and may not peak until much of next year.”

But what if global inflation worsens dramatically? Then, “I would expect [crypto] adoption by buyers and sellers to really explode, ”Leonard Kostovetsky, assistant professor at the Carroll School of Management at Boston College, told Cointelegraph, adding that this was not the most likely outcome:

“I don’t see this happening in the foreseeable future. I guess inflation will be brought under control fairly quickly – maybe over the next four years – as the pressure increases on policymakers to bring it under control. “

Bitcoin has recently received a price increase since the launch of the very first US Bitcoin futures ETF, but it “now appears to be fueled by the sustained inflation that we are seeing in all of the major economies around the world,” Sui Chung, CEO of CF Benchmarks. , a cryptocurrency benchmark administrator, Recount Bloomberg.

Bitcoin, of course, has a fixed supply cap of 21 million BTC. The US dollar, by comparison, is elastic, and the growth of the M1 monetary stock in the United States has more than quintupled over the past five years: from $ 1.378 trillion in September 2016 to $ 7.25 trillion in September 2021 ( 426%), according to to data from the Federal Reserve Bank of Saint-Louis.

“It is true that part of the appeal of cryptocurrencies like Bitcoin stems from the fear of fiat currency inflation,” Goldstein said. “I suspect that inflationary pressure will help the prices of Bitcoin and other cryptocurrencies as well.”

But, BTC’s fixed cap may not make such a difference, others argue. “The price of Bitcoin is determined by demand,” Guillén said. If people think it’s a good store of value, then they’ll buy BTC – which seems to be the case now, he allowed. “But, I wonder what will happen when interest rates go up and people realize that a treasury bill will pay good interest, and that’s so sure.”

“I think that old saw on the limited supply needs to be unboxed,” Chandler said. “We can talk about the currency link now after the 40% rally in October, but what happened to monetary rule in the second quarter when BTC went from $ 58,900 to $ 34,500.”

Bitcoin’s limited supply may not even give it an edge over other cryptocurrencies. Kostovetsky doubted that Bitcoin’s capped circulation would give it a big advantage over Ether (ETH) as a safe haven, for example. “The main advantage of crypto as an inflation hedge would be that there are procurement rules that cannot be manipulated by humans.” Savers would not have to worry about some ” [i.e., politically motivated] increased supply which would make their savings less valuable, ”he said.

Greater impact in the developing world?

Much of the recent inflation talk has focused on the United States, but China also appears to be feeling some effects. The producer price index of this country flew 13.5% in October (year-on-year), after an increase of 10.7% in September. This raises further questions: Will global inflation hit the developing world harder than the developed world, and if so, will poorer countries be more likely to adopt Bitcoin as inflation hedge?

“I see low-income people and countries suffering from the impact of inflation,” said Chandler, especially those with weak banking systems and the number of unbanked households. Before they can profit from Bitcoin or other cryptocurrencies, however, they may need to have, at a minimum, cell phones and some level of financial literacy.

“Bitcoin is proving to be a viable alternative to other more traditional inflation hedges like gold,” Dan Gunsberg, CEO of HXRO Network, told Cointelegraph, adding that “poorer countries will continue to adopt Bitcoin as a hedge against inflation “. That said, while investors may flock to Bitcoin as a safe haven, it is still widely viewed as a risky asset and tends to correlate with other speculative assets like stocks, he added. Guillén was less alarmed on the inflation front:

“So far, emerging markets and developing countries have not experienced higher inflation rates than the United States. The dollar will remain strong. I don’t think we’re going to see high global inflation.

Entering uncharted waters?

Overall, “We are in uncharted territory,” Kostovetsky said. No one really knows if inflation will be severe and widespread or mild and localized, while Gunsberg added that “We have been in uncharted territory for inflation longer than has been publicly disclosed, which has been reflected. in the price of Bitcoin, “as well as other financial assets over the past 12-18 months.

Related:Are institutional investors the main silent partners of crypto?

Yet if inflation rises sharply, as cryptocurrencies manage to become less volatile – two big ones if, admittedly – then “it’s possible that people are keeping their savings in crypto,” Kostovetsky told Cointelegraph, which would indeed mark a big change. .