Is the global economic landscape in new territory with Bitcoin (BTC), and inflation? Although the cryptocurrency has only been around for a short time, the economic climate was generally favorable with stable prices and good growth. However, recent warnings about an inflationary storm have emerged.
What does this mean for Bitcoin? Bitcoin has been long promoted as an inflation hedge by partisans, but not really tested in this manner since its 2009 foundation. This means that BTC will be a safe haven for millions of people and institutions, as an alternative to gold and the United States dollars.
Recent reports such as the 6.2% increase in the US consumer price index (CPI), October, a 30-year-old record, were alarming. However, this bulge in one national economy may be more due to continuing supply-chain snarls or pent-up post pandemic consumer demand rather than secular changes in global markets.
Cointelegraph’s Mauro Guillen, dean of the University of Cambridge’s Judge Business School, stated that “Yes, it [i.e. inflation] is potentially a concern.” However, inflation’s risk is largely linked to consumers’ future expectations. They will buy items sooner if they believe that rising prices will continue to be a constant fact of life.
Guillen stated that “the fact that U.S. customers are putting off buying large-ticket items because of inflation suggests that they believe that inflation will come down.” He added that “I am cautiously optimistic that this temporary situation is temporary.”
Others aren’t as optimistic. Itay Goldstein, a professor at the Wharton School of Finance, said that it is now clear that inflation is not as transitory as was originally hoped. According to Itay Goldstein, the world is facing supply-demand problems after the pandemic. COVID-19-related fiscal and monetary stimulus are also included in recent inflation reports. However, it seems that inflation has taken a stronger hold and will take longer for it to subside.
Marc Chandler, managing director of Bannockburn Global Forex, stated that inflation has increased and not only in the U.S. It was also revealed that China’s CPI rose from 0.7% to 1.5% last week. Will it continue? At this time, it’s unclear. “We do know that the price pressures are not at their peak and will continue to rise well into next year.”
However, what if global inflation was to escalate dramatically? This would mean that “I would expect [crypto] use by both buyers and sellers really explode,” Leonard Kostovetsky (assistant professor at Boston College’s Carroll School of Management), told Cointelegraph, while adding that it isn’t the most likely outcome.
“I don’t see this happening in the near future.” I believe inflation will be under control within the next four years as policymakers are forced to rein in.
Bitcoin saw a price increase recently due to the launch of the first-ever U.S. Bitcoin futures exchange traded fund, but it is now being driven by sustained inflation across all major economies, Sui Chung (CEO of CF Benchmarks), a cryptocurrency benchmarks administrator, stated to Bloomberg.
Bitcoin has a 21 million BTC supply limit. The USD is elastic, and the growth of the US M1 Money Stock has risen more than fivefold in the past five years. It went from $1.378 trillion in September 2016, to $7.245 trillion by September 2021 (426%), according Federal Reserve Bank of St. Louis data.
Goldstein stated that “It is true, part of the attraction to cryptocurrencies such as Bitcoin comes from the fear of inflation with fiat currencies.” “I believe that inflationary pressure will help Bitcoin and other cryptocurrency prices.”
Others believe that BTC’s fixed limit may not make a significant difference. Guillen stated that Bitcoin’s price is determined by the demand. He said that if people believe it is a valuable store of value, they will buy Bitcoin. This seems to be the case right now. “But, I wonder about what will happen if interest rates rise and people realize that a Treasury Bill will pay a nice rate of interest and it is so safe.”
Chandler stated that he believes the old belief about limited supply must be dispelled. “One can talk about money now after the rally of 40% in October. But what happened to the money rules in Q2 when BTC dropped from $58,900 down to $34,500?”
Bitcoin’s limited supply might not give it an advantage over other cryptocurrencies. Kostovetsky thought that Bitcoin’s capped supply did not give it an advantage over Ether (ETH), as a safe-haven. He stated that crypto is a good inflation hedge because it has supply rules that cannot be manipulated by humans. Savers would not have to worry about an “artificial” increase in supply, i.e., one that would lower their savings.
Greater impact in the developing countries?
While much of the inflation debate has been focused on the U.S., China appears to also be feeling some effects. After a 10.7% increase in September, the nation’s producer prices index rose 13.5% in October. Other questions arise from this: Will global inflation be worse for the developing world than it is for the developed world? If so, will the poorer nations adopt Bitcoin as an inflation hedge.
Chandler said that he sees lower-income people and countries being affected by inflation, particularly those with weak banking systems or unbanked households. They must have at least a cell phone and some financial literacy before they can use Bitcoin or other cryptocurrency.
“Bitcoin has been proving to be an alternative to more traditional inflation hedges like Gold,” Dan Gunsberg (CEO at HXRO Network) told Cointelegraph. He also said that while Bitcoin is being seen as a safe haven by investors, it is still considered a risky asset and correlates with other speculative assets such as equities. Guillen wasn’t as concerned about inflation.
“So far, emerging market and developing countries have not experienced inflation rates that are higher than those in the United States. The dollar will not fall. “I don’t believe we will see any high levels of global inflation.”
Kostovetsky stated that “We are in unknown territory.” While no one knows whether inflation will be severe, widespread, or mild, Gunsberg said that “We are in uncharted territory” for inflation. He also stated that the Bitcoin price and other financial assets have reflected this fact over the past 12-18 month.
Related: Are institutional investors key partners in crypto?
Kostovetsky said that cryptocurrencies could become more volatile if inflation rises sharply. This would be a significant shift indeed.