What are you supposed to do in times of inflation? Buy assets, of course – and not only is Bitcoin one of the largest assets in the world, it’s also money in and of itself. When those U.S. dollars decrease in value, Bitcoin lets you hedge against inflation while you continue to buy stuff.
Well, sort of. The link between crypto prices and U.S. inflation is a bit more tenuous than advertised, as we saw once again last Thursday when Bitcoin fell below $63,000 despite government reports showing the first-quarter GDP price index rising 3.1%, up from 1.6% in the last quarter of 2023.
Current price
60800
Bounce to 63500 on cards
Potential bottom forming on ltf#bitcoin pic.twitter.com/uqM4SlEJu0— VECTOR PRIME (@VECTORCP) April 30, 2024
That 3.1% rise was notably higher than the 2.4% that economists polled by Reuters had been predicting. So why did the price of Bitcoin go down instead of up? Several reasons, including the likeliness that the U.S. Federal Reserve will respond by cutting interest rates less than originally forecast. Higher interest rates on money removes some of the incentive to buy assets like Bitcoin.
So, have we been begging the question all this time? Is there no actual correlation between the price of Bitcoin and U.S. inflation? Let’s open up the data vault and have a look-see before we hit those online sportsbooks and bet on crypto going up or down ahead of the 2Q price index reports.
Does Bitcoin Hedge Against Inflation?
It did at one point. Benjamin Blau, Todd Griffith and Ryan Whitby wrote a paper called “Inflation and Bitcoin: A descriptive time-series analysis” that was published in the June 2021 edition of Economics Letters; they found a relationship between the price of Bitcoin and the inflation rate, although it was inflation going up in response to Bitcoin, and not the other way around.
Something changed along the way. According to Forbes, a 2023 report by Bank of America showed the price of Bitcoin decoupling from assets like gold, and moving instead in correlation with stock market indexes, which tend to sag when inflation is high. More on that in a moment.
Does Inflation Affect Bitcoin?
If you mean Bitcoin itself inflating, then yes, yes it does. It’s built right into the system; the supply of Bitcoin increases every time a “miner” completes a block on the blockchain, although that reward is cut in half every four years or so – the most recent halving was April 19 – and the maximum amount of Bitcoin that can be created is 21 million BTC.
Bitcoin was supposed to go up after the halving pic.twitter.com/kUmAkjebO9
— Crypto Tea (@CryptoTea_) April 30, 2024
If you’re asking about the inflation of the U.S. dollar affecting Bitcoin, that’s harder to say. Crypto is still a relatively new technology, and not all economists agree about Bitcoin’s inherent worth as a store of value, as opposed to a speculative asset like gold or silver. And as per Blau, Griffith and Whitby, the data doesn’t show a specific cause-and-effect where the price of Bitcoin goes up in response to higher inflation.
Or at least that was the case with the “old” data. How have things changed now that Bitcoin appears to be moving with the stock markets? Well, rising inflation tends to hurt stocks – especially “growth” stocks – because consumer spending drops. It might take a while before we have enough data to draw any hard conclusions, but it’s plausible that higher inflation now causes lower Bitcoin prices.
Why Is Inflation Still Higher Than Expected?
This is where the rubber meets the road. According to Brian Jacobsen at Annex Wealth Management (as quoted by Reuters on April 25), that 3.1% rise in the GDP price index reflects increased spending on services like insurance and health care, as opposed to household goods. Jacobsen’s numbers had services prices rising 5.4% annualized.
This puts the U.S. Federal Reserve in a bit of a pickle. On one hand, their higher interest rates have succeeded in cooling the overheated economy, as we can see in the decline of household goods being purchased. But that jump in services spending has kept inflation high enough to make it more difficult for the Fed to cut interest rates – much to the chagrin of anyone who owns Bitcoin.
There’s still ample reason to be bullish overall when it comes to Bitcoin. However, these are turbulent waters, so at the very least, we need to watch out for old assumptions about Bitcoin being a hedge against inflation, and be prepared for more downward pressure on the price of Bitcoin if the Fed doesn’t start slashing rates soon.
