Viewed in isolation, higher inflation is not inherently bad for Bitcoin. Finally, Bitcoin’s scarcity provides structural protection against inflation. However, with rising inflation, the probability of an interest rate hike by the central banks also increases. The result is a less accommodative monetary policy, which in turn is very bad for Bitcoin and growth stocks and good for US dollars and government bonds.
As a result of the change of course by the central banks, the above-mentioned innovation stocks have therefore come under a lot of pressure in recent months. Eventually, the cost of financing growth rose and the opportunity cost increased.
In the meantime, the monetary policy situation has calmed down somewhat, meaning that the downward pressure on cryptocurrencies and growth stocks has eased. Although the major central banks are still signaling interest rate hikes, the market currently believes that these will be slower and smaller in the future. Finally, January inflation has fallen for the third straight month in the eurozone and the seventh in the US.
Is Bitcoin good as an inflation hedge?
So whether Bitcoin protects against inflation is primarily a question of timing. As a volatile digital asset, BTC cannot provide immediate protection against inflation, see explanation above. However, for most investors, the focus is on the long-term effect. After all, gold does not provide any real protection against inflation temporarily, but it does in the long term, see price developments over the past few centuries.
Since Bitcoin does not have this track record, unlike gold, no proof of inflation protection can be provided. However, the nature and functionality of Bitcoin speaks very well for the fact that, viewed in the long term, it can serve as good protection against inflation.
After all, Bitcoin is scarcer than gold and due to its lower inflation rate – meaning how many BTC will be mined in the future – generally better suited to maintaining purchasing power than gold. A comparatively low market capitalization, a lack of trust across the board and high regulatory uncertainty mean that the hoped-for image as digital gold is still a long way off.
Inflation: The most likely scenario
Nobody can predict inflation. This is proven by the often wrong forecasts of central bankers and other supposed financial experts. Consequently, one can only consider which scenarios have a high probability.
A popular notion in this context is that inflation comes in waves. After the extreme increase in inflation due to high energy costs and supply chain problems in the previous year, it can be expected that the situation will continue to normalize for the time being and inflation will come down significantly. On the other hand, wage effects and higher producer prices only have an impact with a time lag. With a delay of several months, there may therefore be renewed increases in an inflation rate that has already fallen.
How are the ECB, Fed and Co. reacting?
For the Bitcoin price, the question arises as to what extent the central banks will prematurely distance themselves from their restrictive course. There are mainly two lines of argument in this regard. One side argues that the central banks are more likely to be bluffing with their strict course and will soon be letting the reins loosen again. Especially since there is a fear that the increased financing costs for states, companies and private households will lead to economic problems and for this reason alone it is unlikely that the high and rising key interest rate level will be maintained with falling inflation.
The other side argues that the central banks cannot afford to deviate from their course in the near future. Firstly, because they fear inflation will return again and again, if it falls significantly in the near future, and secondly, to defend their credibility with the markets.
This possible back and forth in the central bank and market reactions speaks for a roller coaster ride on the crypto market. At least if you disregard other factors, such as regulatory issues or progress in adaptation.
