Bitcoin and Inflation: The Proof Will Be Found in the Pudding

By JCRoemer | JCR's Crypto Musings | 1 May 2021


It's spring so it's earnings season for the S&P 500. This earnings season is creating some interesting market conditions. For example, a recent study published by Bank of America found a significant increase in mentions of "inflation." Inflation is the dirty word between every line, on everyone's tongues, and in the back of everyone's mind.

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Stocks and markets being the psychological extensions of human greed, seem to be willing themselves into a recession. And while the Fed shows us pictures of Jerome Powell looking at Bitcoin charts, they've signaled that they will let inflation run up above the 2% comfort level. When it comes to inflation, the key indicator to look for is when the rate of inflation outpaces the rate of wage growth. If inflation beats wage growth quickly, the Fed would likely start pulling levers sooner and more aggressively than forecast, setting up a recession scenario. People get spooked, sell-offs start to run on, before we know it, we've spoken a recession into existence. 

Meanwhile, we are all aware that the Turkish central bank banned payments using digital currency as the lira crashes and Turks stream into Bitcoin as a store-of-value, a hedge against inflation. This is exactly what the Bitcoin boosters have always proclaimed atop their soapboxes, and now, there appears to be an opportunity on the horizon to put Bitcoin to the test. Bitcoin, created on the heels of the 2008-09 economic disaster, has never truly been tested as a refuge of wealth, a hedge against inflation. Since 2009, Bitcoin has enjoyed an existence in a largely bull market with low inflationary rates. 

The possibility of the test has Bitcoin boosters proclaiming possible price action anywhere from $100k to $400k in the coming months and years. This weekend, Bitcoin is busy re-testing a well established zone of resistance around $57k-$58k. 

The larger question remains, how will the United States government respond to Bitcoin in an inflationary environment if it strengthens significantly against a weakening USD? After all, the greenback makes the world go 'round and the United States has never been fond of competition (see China, Communist Part of; Union of Soviet Socialist Republics; Nazi Germany) when the competition heated up. After all, Bitcoin and blockchain technology might be disruptive enough to upset the new world order established towards the end of World War 2 which propelled the United States to world dominance and unimaginable wealth. The fear will always remain that the United States will respond the way Turkey and India are responding to Bitcoin.

As we close the first third of 2021, we find the SEC attempting to approve the first American Bitcoin ETF which will open the Bitcoin market to significant new capital inflows, we see commodities like lumber surging in price (anyone buy any copper lately?), we see businesses beginning to raise price, we hear we might not be able to get decent raises because of COVID recovery, Coinbase had a successful IPO and is now publicly traded offering yet more indirect exposure to cryptocurrency, and the recent price surge in the cryptomarkets took market cap over $2 trillion and infused a lot of new money into crypto projects at a time when these projects were running out of capital from their 2017 ICOs. The scene is setting up nicely for Bitcoin and the alt-coins. And, let's not forget, there is a 52% correlation between rising inflation mentions on earnings calls and economic decline. We may be literally talking ourselves into a perfect environment for Bitcoin price to surge. 

 

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JCRoemer
JCRoemer

Baltimore bred and spread. Egg custard with marshmallow. Pan-fried crab cakes. JO not Old Bay. Peppermint in lemon. Grape jam on scrapple. Ketchup on your eggs.


JCR's Crypto Musings
JCR's Crypto Musings

A collections of thoughts, ideas, and analysis of various crypto projects. Opinions are my own. Not financial advice.

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