I have been hearing about rising inflation for a really long time. It hasn’t happened, yet. It looks as if things may change later this year.
When I was a very young man I bought my first CD (certificate of deposit). They are terrible investments today, but back then, you could easily get a 2 year CD rate for 7% interest or more. Savings accounts were earning 2%. Back then, gold was about $200 an ounce. Bitcoin may have been a dream in Satoshi Nakamoto's creative mind, but if so, he hadn’t shared it with the rest of us.
Fast forward to today, CDs and traditional savings accounts are great to hold your money safely, but they are terrible investment choices. Gold is hovering around $1700 an ounce, and Bitcoin is well, you all know what happened with this rise of cryptocurrency this past year.
Bitcoin first passed gold prices year ago, but BTC followed the pattern of gold for a long time, until this year. What has changed? Many things; however, nothing less influential that this: New evidence in rising inflation and the perception that Bitcoin is a better hedge against inflation.
Although we have heard warnings of rising inflation for decades, now all the parts are in place to see it happen. If and when it does, crypto enthusiasts and investors may be in for quite a ride.
First, here are what some of the experts are saying. CNBC writer Michael Farr writes,
"Investors are justifiably concerned that the combination of sustained Fed interest-rate suppression and trillions in additional fiscal stimulus will result in a burst of pent-up demand that outstrips the supply of everything from haircuts to plane fares. The evidence supporting this possibility is mounting.
Longer-term interest rates have risen sharply, with the 10-year yield rising to about 1.40% today from around 0.91% at the beginning of the year. Commodity prices are up as well. The Invesco Deutsche Bank Commodity Index is up 14% this year, with increases in critical engines of economic growth like oil, copper and steel."
“Harvard economist Lawrence Summers raises the prospect of ‘inflationary pressures we have not seen in a generation, with consequences for the value of the dollar and financial stability.’”
It is important to note that not everyone agrees. It is also understandable that there would be skeptics, because every year or two a few experts come out and say that “inflation is coming, inflation is coming” like Chicken Little’s “The sky is falling.” However, this time it might be different. Never before has the federal government printed more money and put more free-flowing money into the economy. Now, with Biden’s new infrastructure bill, there will be hundreds of billions more cash flowing through the economy.
I believe that higher inflation is coming, but probably not as bad as it was in the 70’s and 80’s. It may be a good thing overall. The real question on many of our minds, is this: How will inflation affect cryptocurrency prices? Well, in short, they would be expected to rise, along with the prices of everything else.
Bitcoin has a built-in system to curb any negative effects of inflation. Unlike the dollar that just keeps getting printed, BTC has a limited supply. New Bitcoin will soon be a thing of the past. This alone should cause a rise in Bitcoin prices. This is what made gold so attractive for generations—scarcity of supply. Fears of inflation have already caused some investors to flock to Bitcoin. Interestingly, many of these same investors would have gone to gold in the past. In a world without cryptocurrency, gold prices should likely be skyrocketing; however, it has been stagnant since Bitcoin's sharp recent rise.
Notice the strong correlation between gold and Bitcoin prices:
Since this chart, which is less than a year old (ancient history in the BTC world), Bitcoin has grown about 350% and gold has risen modestly, by about 15%. This strongly implies that Bitcoin, at least for now, is not just the gold standard of cryptocurrencies, it IS the new gold. Although gold’s luster will always shine brightly as a commodity with tangible value, perception means even more in terms of pricing. In fact, it is more than perception. Cryptocurrencies have arguably more practical applications than gold does. Bitcoin is more attractive than gold in today’s world and it is very difficult to see any future in which this will not hold true. BTC's long-standing correlation with gold is over. Bitcoin won in this long bout of two heavyweights.
What does all of this mean for those of us with positions in BTC or other cryptocurrencies? Well, I do not know the future with certainty, but it points to a continuation of more money flowing into crypto. This is in addition to more big names like PayPal, Visa, and Elon Musk getting involved. And with names like COIN soon to be publicly traded on Wall Street, it only helps with perception of the legitimacy of crypto.
Happy trading! As always, buy, sell, trade, and exchange at your own risk. I am not a professional. I am just an average joe that likes to read, research, and share his findings. Of course I appreciate follows, tips, and comments.