Risky assets like Bitcoin typically thrive in a low-inflation environment. Of course this is not entirely accurate. Rather, risky assets like Bitcoin are heavily favored by loose monetary policy. I mean, the price of Bitcoin rises in large part thanks to the stimuli of the central banks. In particular, with the stimuli from the United States Federal Reserve. In fact, it could be said that this is true for most assets. risk-on. Why?
If Bitcoin is the “digital gold” and gold is considered to be an inflation hedge, that should imply that Bitcoin is also an inflation hedge. On the other hand, if the dollar issuance is potentially infinite and the supply of Bitcoin is limited, that should mean that the dollar will always fall in price and Bitcoin will always rise in price. Additionally, if the price of Bitcoin has risen dramatically in recent years, that means that it will always perform better than the dollar. However, despite all these popular notions, Bitcoin falls in price on announcements of high inflation and rises in price on announcements of a decline. How do we explain this?
All the confusion around the issue of inflation on the part of many bitcoiners is due to a strange combination of false equivalencies, false causes and wrong conclusions.. These are assumptions coming from a narrative with a strong ideological bias that does not always correspond to the facts and evidence. Bitcoin does not behave the same as gold. Bitcoin is not a hedge against inflation. Bitcoin increases in price due to demand. And Bitcoin does not behave the same in all conditions. At this stage in its brief history, Bitcoin behaves like a risky asset. CLike other risky assets, Bitcoin thrives in environments of high monetary liquidity and high sentiment. risk on (risk appetite).
Inflation does not affect everyone in the same way. If the price of gasoline goes up, the cyclist does not suffer as much as the taxi driver. The wage earner, whose employer does not adjust wages, suffers more than the merchant who transfers his inflation to his clientele. Debtors suffer less than creditors, because paying off old debts is easier with a devalued currency. Asset owners suffer less than cash accumulators. If a high percentage of your salary goes on food, transportation and housing, a price increase in these items will have a greater impact on your pocket.
If you don’t live in the United States, inflation in that country doesn’t have as direct an effect. In fact, in this case, inflation in the US is a variable (due to the issue of exports and imports), but the exchange rate between the dollar and the national currency is also quite relevant. For example, for a Latin American, the price of gasoline in the United States does not have a direct effect on his life. The most relevant is the price of gasoline in your country of residence and the exchange rate of your currency. I mean, In relation to inflation in the United States, the experience of the person outside the United States with dollars is not exactly the same as the experience of a resident of the United States.
Around the inflation debate, it is extremely important to cut out the noise and nonsense. First of all, anecdote is not a reliable indicator of inflation. In other words, a visit to the supermarket does not make you an expert on inflation. Forget it! Second, it is essential to put politics aside. The right always blames the government for inflation. And the left always blames corporate greed. That’s fun for a kitchen conversion over coffee. But it is more talk and gossip than serious analysis.
For purposes of our investments, “inflation” is inflation according to the Federal Reserve. In other words, these are numbers and reports from official channels. In this context, its importance lies in its effects on monetary policy, first, and on financial markets, second.
However, inflation is not only a monetary phenomenon. MV=PQ. The monetary mass (M) is variable. The velocity of money (V) is variable. And the production (Q) is variable. Currently, these factors are highly variable. Thus, inflation is a multifactorial phenomenon. Central banks only have tools to reduce demand through a reduction in liquidity. Which implies that many factors are out of your control. Oil production, for example. Anyway, the production and distribution chains go beyond the powers of the monetary authorities.
The United States Federal Reserve has been raising rates and reducing its balance sheet in order to cool down the economy. In this way, combat inflation so that it returns to 2%, by reducing demand. The measures, in part, are working. In fact, headline inflation for July (9.1%) was lower than headline inflation for June (8.5%). What is positive. Here we are talking about the Consumer Price Index (CPI). However, the devil is in the details. The main responsible for this decrease is gasoline. True, the price of gasoline has been going down for several days. But we still have a war in Europe. And the structural problems with oil production have not yet disappeared.
On the other hand, the other items are still increasing. Food, for example. LCore inflation (Core CPI) also fell from 6.1% in June to 5.9% in July. Inflation in goods is falling due to a glut in inventories. However, inflation in non-energy services increased. There are still serious problems in the supply chains.
The latest CPI, without a doubt, represents progress. However, it is still too early to claim victory. It is premature to get so excited at the first change. There is still a long way to go. The labor market remains overheated. Consumption is still very high. And people still have a lot of money in their pockets. It is quite possible that the market is underestimating the challenges ahead. In my opinion, it is very likely that the Fed will have no choice but to raise rates higher than anticipated in order to tame the beast. This means that we could have a tight monetary policy for a longer time. Going from 8.5% to 2% will not be easy. I happily receive this reduction of 0.6% in a month. But I’m afraid it also reminds us that this is just a start.
What is Bitcoin? Bitcoin is a code. A code, by definition, has no intrinsic value. It is an abstraction. Numbers and letters in a database. Of course that code represents an exchange rate. That rate is your price. In other words, the code does have a monetary value. Actually, we are talking about a pair: BTC/USD. In this pair, BTC is risk on and USD is risk-off. Y the factor that makes the difference here is the monetary policy implemented by the United States Federal Reserve. And that policy at the moment depends, in part, on the inflation data as they arrive. Take your seats and fasten your seat belt. This journey is just beginning.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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