Recent economic reports have warned of an inflationary storm in the United States. What does this mean for Bitcoin? Will millions flock to BTC as an alternative to gold or the U.S. dollar?
Is the world economy, in terms of Bitcoin (BTC) and inflation, in unknown territory? The economic climate has been mostly pro-growth with stable prices for the majority of the cryptocurrency’s limited existence, but there have recently been new warnings of an inflationary storm.
If that’s the case, what does it mean for Bitcoin, which has been touted as an inflation hedge by proponents but hasn’t been put to the test since its inception in 2009? Will BTC become a safe haven for millions of people and institutions as an alternative to gold and the US dollar?
Recent reports, such as the US consumer price index (CPI) rising 6.2 percent in October, setting a 30-year high, were sobering, though this recent bulge in a single national economy may be more related to ongoing supply-chain snarls and pent-up post-pandemic consumer demand than any secular change in global markets.
“Yes, it [inflation] may be an issue,” said Mauro Guillén, head of the Judge Business School at the University of Cambridge. However, a large part of the threat of inflation is linked to customers’ future expectations. If consumers believe that rising prices will be an unavoidable feature of life, they will buy products sooner rather than later in order to avoid higher prices.
“The fact that Americans are deferring big-ticket purchases due to inflation shows that they expect inflation will fall,” Guillén said, adding, “I am cautiously optimistic that this is a temporary situation.”
Others, on the other hand, are a little more pessimistic. Itay Goldstein, a professor of finance at the Wharton School, told Cointelegraph, “It is evident now that inflation is less temporary than was previously assumed.” Following the epidemic, the world is grappling with supply-demand imbalances, and recent inflation data reflect COVID-19-related monetary and fiscal support, but “it appears that inflation has gained a deeper hold and will take longer to decrease,” according to him.
Is it a worldwide trend?
“Inflation has accelerated globally, not only in the United States,” said Marc Chandler, managing director of Bannockburn Global Forex. “We also discovered last week that China’s CPI increased from 0.7 percent to 1.5 percent year over year,” according to the article. Is there any hope? At this point, it’s unclear. “What we do know is that price pressures haven’t peaked yet, and they may not until well into next year.”
But what if global inflation spikes? Then, according to Leonard Kostovetsky, assistant professor at Boston College’s Carroll School of Management, “I would expect [crypto] adoption by both buyers and sellers to absolutely boom,” but he cautioned that this isn’t the most likely outcome:
“I don’t see this happening any time in the foreseeable future. My guess is that inflation will get under control fairly soon — next four years, perhaps — as pressure grows on policymakers to rein it in.”
The first-ever U.S. Bitcoin futures ETF debuted recently, but Bitcoin “looks to currently be powered by the prolonged inflation that we are witnessing across all of the world’s major countries,” according to Sui Chung, CEO of CF Benchmarks, a cryptocurrency benchmarks administrator.
Of fact, Bitcoin has a fixed supply cap of 21 million coins. According to Federal Reserve Bank of St. Louis data, the US M1 Money Stock has grown more than five-fold in the last five years, from $1.378 trillion in September 2016 to $7.245 trillion in September 2021 (426 percent).
“It’s true that part of the appeal of cryptocurrencies like Bitcoin stems from the fear of fiat currency inflation,” Goldstein added. “Inflationary pressure, I believe, will so help Bitcoin and other cryptocurrency values.”
Others, however, argue that BTC’s fixed cap may not make a significant difference. “Demand drives the price of Bitcoin,” Guillén explained. People will buy BTC if they believe it is a good store of value, which appears to be the case right now, he said. “However, I’m curious what will happen when interest rates rise and people learn that a Treasury bill pays a good interest rate and is really safe.”
“I believe the old adage about limited supply needs to be debunked,” Chandler added. “After the 40% increase in October, one can talk about the money link, but what happened to the money rule in Q2 when BTC plunged from $58,900 to $34,500?”
The limited quantity of Bitcoin may not even offer it a competitive advantage over competing cryptocurrencies. Bitcoin’s capped circulation, according to Kostovetsky, offered it no significant edge over Ether (ETH) as a safe haven. “The main advantage of crypto as an inflation hedge is that there are supply rules that humans cannot alter.” He claimed that savers wouldn’t have to worry about a “artificial [i.e., politically motivated] increase in supply that would devalue their investments.”
Is it possible to have a bigger influence on the developing world?
Much of the recent inflation debate has focused on the United States, but China appears to be suffering the impacts as well. The producer price index in that country increased 13.5 percent year over year in October, following a 10.7 percent gain in September. This raises other considerations, such as whether developing countries will be hurt more by global inflation than rich countries, and if so, if poorer countries will be more likely to use Bitcoin as an inflation hedge.
“I certainly see lower-income people and countries suffering from inflation,” Chandler added, citing countries with poor banking institutions and large numbers of unbanked households as examples. However, they will almost certainly need cell phones and some amount of financial literacy before they can take use of Bitcoin or other cryptocurrencies.
“Bitcoin is proving to be a viable alternative to other more traditional inflation hedges like gold,” said Dan Gunsberg, CEO of HXRO Network, adding that “poorer countries will continue to use Bitcoin as an inflation hedge.” While investors may flock to Bitcoin as a safe haven, he continued, it is still commonly seen as a risk asset that tends to connect with other speculative assets such as shares. On the subject of inflation, Guillén was less concerned:
“So far, inflation rates in emerging markets and developing countries have not exceeded those in the United States. The dollar will continue to be strong. I don’t believe global inflation will be high.”
Are we venturing into uncharted waters?
Overall, Kostovetsky stated, “We are in unknown ground.” Nobody knows whether inflation will be severe and widespread or mild and localized, according to Gunsberg, who also stated that “we’ve been in uncharted territory for inflation for longer than what’s been publicly communicated, which has been reflected in the price of Bitcoin and other financial assets over the last 12-18 months.”
Still, if inflation rises substantially while cryptocurrencies become less volatile — two large ifs, obviously — “there is potential for people to retain their savings in crypto,” according to Kostovetsky, which would be a significant shift.
