Is the global economy in uncharted territory now versus Bitcoin (BTC) and inflation? For most of the short life of the cryptocurrency, the economic environment has been generally growth-friendly with prices stable, but recently, there are fresh warnings of an inflationary storm.
If so, what does it mean for Bitcoin, long promoted by supporters as an inflation hedge, even though it hasn't really been tested in this way since its founding in 2009? That is, will millions of people and institutions flock to BTC as a safe haven, an alternative to gold or the US dollar?
Recent reports, such as the 6.2% October increase in the United States consumer price index (CPI), a 30-year record, were sobering, although this recent surge in a single national economy could be more related to current supply chain tangles and demand for consumer repressed after the pandemic. than any secular change in global markets.
"If that [i.e., inflation] it's potentially a problem, โMauro Guillรฉn, dean of the Judge Business School at the University of Cambridge, told Cointelegraph. But much of the danger of inflation is tied to consumer expectations about the future. If they believe that continued price increases are an enduring fact, then they will buy items sooner rather than later, anticipating higher prices.
"The fact that American consumers are putting off buying expensive 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. "It is now clear that inflation is less transitory than initially expected," Itay Goldstein, a finance professor at the Wharton School, told Cointelegraph. The world is battling supply-demand imbalances after the pandemic, and fiscal and monetary stimulus related to COVID-19 is also influencing recent inflation reports, but "it appears that inflation has taken hold more deeply. and it will take longer to decrease, "according to him.
A global phenomenon?
"Inflation has accelerated, and not just in the United States," Marc Chandler, managing director of Bannockburn Global Forex, told Cointelegraph. Last week "we also learned that China's CPI jumped from 0.7% year-on-year to 1.5%." It will last? It is not clear at this time. "What we do know is that price pressures have not peaked and may not peak until well into next year."
But what if global inflation drastically worsened? Then "I would wait [crypto] adoption by buyers and sellers really explodes, โLeonard Kostovetsky, assistant professor at Boston College's Carroll School of Management, told Cointelegraph, adding that this is not the most likely outcome:
โI don't see this happening in the foreseeable future. My guess is that inflation will be under control quite soon, in the next four years perhaps, as pressure increases on the authorities to control it. "
Bitcoin received a price surge recently since the debut of the first US Bitcoin futures ETF, but "now appears to be driven by the sustained inflation that we are witnessing in every major world economy," Sui Chung, CEO of CF Benchmarks. , cryptocurrency comparison manager, saying Bloomberg.
Bitcoin, of course, has a fixed supply limit of 21 million BTC. The USD, by comparison, is elastic, and the growth of the United States' M1 monetary stocks has multiplied by five in the last five years: from $ 1,378 trillion in September 2016 to $ 7,245 trillion in September 2021 (426%) , according to data from the Federal Reserve Bank of St. Louis.
"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 help the prices of Bitcoin and other cryptocurrencies."
But, BTC's fixed limit may not make such 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 admitted. "But I wonder what will happen when interest rates go up and people realize that a Treasury bill will pay good interest, and it's so safe."
"I think you need to unpack that old approach to limited supply," Chandler said. "You can talk about the money link now after the 40% rally in October, but what happened to the money rule in Q2 when BTC fell from $ 58,900 to $ 34,500."
Bitcoin's limited supply may not even give it an edge over other cryptocurrencies. Kostovetsky doubted that Bitcoin's limited circulation would give it a huge advantage over Ether (ETH) as a safe haven, for example. "The key advantage of cryptocurrencies as protection against inflation would be that there are supply rules that humans cannot manipulate." Savers wouldn't have to worry about some [i.e., politically motivated] increased supply that would make your savings worth less, "he said.
Greater impact on the developing world?
Much of the recent discussion about inflation has focused on the United States, but China also appears to be feeling some effects. That nation's producer price index it shot itself 13.5% in October (year-on-year), after an increase of 10.7% in September. This raises other questions: Will global inflation hit the developing world more than the developed world, and if so, are poorer countries more likely to adopt Bitcoin as a hedge against inflation?
"I see low-income people and countries being hit by inflation," Chandler said, especially those with weak banking systems and numbers of unbanked households. However, before they can take advantage of Bitcoin or other cryptocurrencies, they may need to own, at a minimum, cell phones and a certain level of financial education.
"Bitcoin is proving to be a viable alternative to other more classical inflation hedges such as gold," Dan Gunsberg, CEO of HXRO Network, told Cointelegraph, adding that "poorer countries will continue to adopt Bitcoin as a hedge against inflation." That said, while investors may flock to Bitcoin as a safe haven, it is still considered a risky asset and tends to correlate with other speculative assets like stocks, he added. Guillรฉn was less alarmed on the inflation front:
โSo far, emerging markets and developing countries are not experiencing higher inflation rates than the United States. The dollar will remain strong. I don't think we will see high global inflation. "
Entering uncharted waters?
Still, "We are in uncharted territory," Kostovetsky said. No one really knows if inflation will be severe and generalized or mild and localized, while Gunsberg added that "we have been in uncharted territory for inflation for longer than what has been publicly reported, which has also been reflected in the price. of Bitcoin ". as other financial assets during the last 12-18 months.
Related:Are Institutional Investors the Key Silent Partners of Cryptocurrencies?
Still, if inflation rises dramatically, while cryptocurrencies manage to become less volatile (two big yes, no doubt), then "there is a chance that people will keep their savings in crypto," Kostovetsky told Cointelegraph, which would mark a big sea change. .
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