The global economy is in uncharted territory when it comes to Bitcoin (BTC) and inflation? For much of the crypto asset’s short life, the economic environment has generally been favorable to growth with stable prices, but new warnings of an inflationary storm have recently emerged.
If so, what does it mean for Bitcoin, which has long been advertised by its supporters as a hedge against inflation although not actually tested for this purpose since its creation in 2009? Can we expect millions of individuals and institutions to rely on BTC as a safe haven, an alternative to gold and the US dollar?
Recently published reports, such as the6.2% increase in October consumer price index (CPI) in the United States, a record for the past 30 years, are cause for concern. However, this spike in a single national economy may be more related to ongoing supply and demand issues and pent-up consumer demand post-pandemic than a fundamental shift in global markets.
“Yes, inflation is potentially a problem,”Mauro Guillén, rector of the Judge Business School at the University of Cambridge, explains to Cointelegraph. Despite this, much of the inflationary risk is linked to the future expectations of consumers. If they believe that rising prices are a lasting phenomenon, they will buy goods as soon as possible, anticipating higher prices.
“The fact that US consumers are postponing the purchase of expensive products due to inflation suggests that they believe inflation will decline.“Said Guillén, adding:”I am cautiously optimistic that it is a temporary phenomenon.”
Others are not that positive. “It is now clear that inflation is less transient than initially hoped,”Comments Itay Goldstein, finance professor at the Wharton School. The world is grappling with supply-demand imbalances following the pandemic, and COVID-19-related monetary and fiscal stimuli influence recent inflation reports, but “inflation appears to have caught on and will take longer to subside.”
A global phenomenon?
“Inflation is accelerating, and not just in the US,Marc Chandler, CEO of Bannockburn Global Forex, explains to Cointelegraph. Last week “we found that China’s CPI rose from 0.7% last year to 1.5%.” Will last? It is still not clear. “We just know that price pressures have not yet peaked and may not peak until next year. “
But what if global inflation were to worsen dramatically? “I expect a real explosion of crypto adoption by buyers and sellers,”Says Leonard Kostovetsky assistant professor at Boston College’s Carroll School of Management, adding that this is not the most likely outcome:
“I don’t think it will happen in the near future. My guess is that inflation will get back under control soon enough, in the next four years perhaps, as pressure increases on lawmakers to contain it. “
Recently, the price of Bitcoin received a boost from the debut of the first Bitcoin futures ETF in the US, but “now it seems supported by the sustained inflation we are seeing in all the big economies of the world,” has explained to Bloomberg Sui Chung, CEO of crypto benchmark administrator CF Benchmarks.
Bitcoin, of course, has a fixed supply of 21 million BTC. The USD, on the other hand, is elastic and the growth of the US M1 money supply has multiplied more than five times in the past five years. Standing according to data from the Federal Reserve Bank of St. Louis, it went from $ 1.378 billion in September 2016 to $ 7.245 billion in September 2021 (426%).
“It is true that part of the appeal of cryptocurrencies like Bitcoin stems from inflation fears in fiat currencies.”Adds Goldstein. “I suspect that the inflationary pressure will help the prices of Bitcoin and other cryptocurrencies.”
However, others argue that the limited supply of BTC may not make a big difference. “Bitcoin’s price is driven by demand,”Indicates Guillén. If people believe it is a valid store of value, they will buy BTC, which seems to be happening now. “But I wonder what will happen if interest rates go up and people realize that a treasury bill pays a lot of interest and is so safe.”
“I believe that the old notion of limited supply should be abandoned,Chandler comments. “Some might talk about Bitcoin as a currency after the 40% rally in October, but what happened to its role as a currency in Q2 when BTC plunged from $ 58,900 to $ 34,500.”
Bitcoin’s limited supply may not even offer an edge over other cryptocurrencies. Kostovetsky doubts Bitcoin’s fixed circulation gives it significant advantages as a safe haven over Ether (ETH), for example. “The key advantage of cryptocurrencies as a hedge against inflation are supply rules that cannot be manipulated by humans.“Savers need not worry about a”artificial (politically motivated) increase in supply that devalues their savings,” has explained.
A greater impact in developing countries?
Much of the recent inflation discussion focuses on the US, but China appears to be feeling the effects as well. The country’s producer price index is soaring by 13.5% in October (on an annual basis), after a growth of 10.7% in September. This raises other questions: Will global inflation hit developing countries harder than developed ones? And if so, are poorer countries more likely to adopt Bitcoin as an inflation hedge?
“I predict that individuals and countries with lower incomes will be impacted by inflation,Chandler says, especially those with weak banking systems and a large number of non-bankable individuals. Before they can exploit Bitcoin or other cryptocurrencies, however, they must have at least cell phones and a certain level of financial literacy.
“Bitcoin is proving to be a viable alternative to more classic inflation hedges such as gold.“Dan Gunsberg, CEO of HXRO Network, explained to Cointelegraph, adding that”poorer countries will continue to adopt Bitcoin as a hedge against inflation.That said, even though investors may rely on Bitcoin as a safe haven, the cryptocurrency is still widely viewed as a risk asset and tends to correlate with other speculative assets such as stocks, he continued. Guillén said he was less alarmed on the inflationary front:
“So far, emerging markets and developing countries are not seeing higher inflation rates than the United States. The dollar will remain strong. I don’t think we will see high global inflation. “
Are we entering uncharted territories?
All in all, “we are in uncharted territory,”Says Kostovetsky. No one really knows whether inflation will be severe and widespread or light and limited, while Gunsberg adds that “we have been in uncharted territory as far as inflation is concerned for much longer than has been publicly disclosed, which has been reflected in the price of Bitcoin,”In addition to other financial assets in the last 12-18 months.
Related:Are institutional investors the silent key partners of the crypto sector?
Either way, if inflation rises sharply and if cryptocurrencies manage to become less volatile (no doubt two big ifs), “it is possible that people will start keeping their savings in crypto,”Concludes Kostovetsky, marking an important turnaround.
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