Is the world economy in uncharted territory relative to Bitcoin (BTC) and inflation? For most of the short life of the cryptocurrency, the economic environment has been generally favorable to growth and with stable prices, but recently there are new warnings of an inflationary storm.
If so, What does it mean for Bitcoin, long touted by its supporters as a haven against inflation even though it hasn’t really been tested in this way since its inception in 2009? That is to say, Will millions of people and institutions flock to BTC as a safe haven; an alternative to gold or the US dollar?
Recent reports, as the 6.2% increase in October in the US consumer price index (CPI) (a 30-year record) was sobering, although this recent rebound in a single national economy could be more related to current supply chain setbacks and suppressed post-pandemic consumer demand than to any secular change in world markets.
“Yes, [es decir, la inflación] is potentially a problem “, told Cointelegraph Mauro Guillén, Dean of the Judge Business School at the University of Cambridge. But much of the danger of inflation is tied to consumer expectations about the future. If they believe that continued price increases are a lasting fact, then they will buy items sooner rather than later, anticipating higher prices.
“The fact that American consumers are putting off buying high-value items due to inflation suggests that they believe inflation will go down.” Guillen said, adding: “I am cautiously optimistic that this is temporary.”
Others are not so optimistic. “Now it is clear that inflation is less transitory than initially expected,” told Cointelegraph Itay Goldstein, professor of finance at the Wharton School. The world is battling supply-demand imbalances in the aftermath of the pandemic, and monetary and fiscal stimuli related to COVID-19 are also influencing recent inflation reports, but “It seems that inflation has taken hold more and it will take longer to disappear”, according to him.
A global phenomenon?
“Inflation has accelerated, and not only in the United States”, told Cointelegraph Marc Chandler, Managing Director of Bannockburn Global Forex. Last week “tWe also learned that China’s CPI jumped from 0.7% year-on-year to 1.5%. “Will it last? Not clear at the moment. “What we do know is that price pressures have not peaked and may not do so until the middle of next year.”
But what if global inflation worsened dramatically? So “I would expect adoption [de las criptomonedas] by buyers and sellers will skyrocket “, said Leonard Kostovetsky, Adjunct professor at Boston College’s Carroll School of Management, to Cointelegraph, though he added that this is not the most likely outcome:
“I don’t see this happening in the near future. My view is that inflation will be brought under control quite soon (the next four years, perhaps) as the pressure on policy makers to curb it increases.”
Bitcoin received a boost in price recently from the debut of the first Bitcoin futures ETF in the United States, but “It appears that now it is fueled by the sustained inflation that we are witnessing in all the major economies of the world,” told Bloomberg, Sui Chung, CEO of CF Benchmarks, a cryptocurrency benchmark manager.
Bitcoin, of course, has a maximum fixed supply of 21 million tokens. The dollar, in comparison, is inflationary and the growth of the M1 money supply of the United States has multiplied by more than five in the last five years: from USD 1.378 trillion in September 2016 to USD 7.245 trillion in September 2021 (426 %), according to data from the Federal Reserve Bank of San Luis.
“It is true that part of the appeal of cryptocurrencies like Bitcoin stems from the fear of inflation in fiat currencies,” Goldstein said. “I suspect that inflationary pressure will thus benefit the prices of Bitcoin and other cryptocurrencies.”
But, BTC’s fixed maximum may not make that much of a difference, others argue. “The price of Bitcoin is driven by demand”, Guillen said. If people believe that it is a good store of value, then they will buy BTC, which seems to be the case now, he elaborated. “But I wonder what will happen when interest rates go up and people realize that a Treasury bond pays good interest, and just as certain.”
“I think that old saw needs to be unpacked on limited supply,” Chandler said. “You can talk now about the monetary link after the 40% rally in October, but what happened to the money rule in the second quarter when BTC fell from $ 58,900 to $ 34,500.”
The limited amount of Bitcoin may not even give you an advantage over other cryptocurrencies. Kostovetsky doubted that the fixed supply of Bitcoin would give him a huge advantage over Ether (ETH) as a safe haven, for example. “The key advantage of cryptocurrencies as a hedge against inflation would be that there are supply rules that cannot be manipulated by humans.” Savers would not have to worry about some “artificial increase [es decir, motivado políticamente] of the offer that causes their savings to devalue, “he said.
Greater impact on the developing world?
Much of the recent inflation debate centered on the United States, but China also appears to be feeling some effects. That country’s producer price index shot up 13.5% in October (in year-on-year terms), following a 10.7% increase in September. This raises other questions: Will global inflation hit the developing world harder than the developed world, and if so, will the poorest countries be more likely to adopt Bitcoin as a hedge against inflation?
“I see people and lower-income countries suffer the impact of inflation,” Chandler said, especially those with weak banking systems and a number of unbanked households. However, before they can tap into the potential of Bitcoin or other cryptocurrencies, they arguably need to own, at a minimum, mobile phones and a certain level of financial knowledge.
“Bitcoin is proving to be a viable alternative to other more classic inflation hedges such as gold,” Dan Gunsberg, CEO of HXRO Network, told Cointelegraph, adding that “The poorest countries will continue to adopt Bitcoin as a hedge against inflation.” That said, although investors flock to Bitcoin as a safe haven, it is still considered a risk asset and tends to correlate with other speculative assets like equities, he added. Guillén was less alarmed about inflation:
“So far, emerging markets and developing countries are not experiencing inflation rates higher than the United States. The dollar will remain strong. I don’t think we will see high inflation globally.”
Entering uncharted waters?
Definitely, “we are in unknown territory”, Kostovetsky said. No one really knows whether inflation will be severe and generalized or mild and localized, while Gunsberg added that “we have been in uncharted territory for inflation longer than has been publicly reported, which has been reflected in the price of Bitcoin,” as well as in other financial assets in the last 12-18 months.
However, if inflation rises sharply and cryptocurrencies become less volatile (two big “yeses,” admittedly), then “there is potential for people to keep their savings in crypto,” Kostovetsky told Cointelegraph, which would mean a great change.
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