- Some analysts put the sharp recovery in bitcoin down to U.S. CPI data and the role of the cryptocurrency as a potential hedge against inflation.
- That inflation was more or less in line and perhaps the Fed doesn’t need to accelerate tightening could provide a more optimistic outlook for cryptocurrencies.
The debate on whether bitcoin is a hedge against inflation or a volatile risk asset rages on and yesterday, bitcoin soared past US$44,000 for the first time in a week, even as it now trades around US$43,500 (at the time of writing).
Some analysts put the sharp recovery in bitcoin down to U.S. CPI data and the role of the cryptocurrency as a potential hedge against inflation.
Others point to comments from U.S. Federal Reserve Chairman Jerome Powell at his Senate confirmation hearing that appear to reflect a central bank still focused on growth and unemployment, dealing with inflation as needed to the cause for bitcoin’s rebound.
Although Consumer Price Index data rose at its fastest pace annually in forty years, a closer examination of the components of price increases suggests that they are due materially to supply chain disruptions or pandemic pressures, feeding into the prospect that inflation may (gasp) actually be “transitory” (to borrow a term discarded by the Fed).
That inflation was more or less in line and perhaps the Fed doesn’t need to accelerate tightening could provide a more optimistic outlook for cryptocurrencies.
Although bitcoin maximalists have long touted the inflation-hedging chops of the cryptocurrency, on account of their being an idiosyncratic asset class, there just isn’t enough data, nor does it go back long enough to make that determination.
While only 21 million bitcoin will ever be created, that bitcoin is deflationary in and of itself doesn’t necessarily contribute significantly to its role as an inflation hedge – it’s whether or not investors agree on it fulfilling that role that matters.
If nothing else, the prospect that the Fed won’t be as aggressive in its tightening, especially on a qualitative examination of CPI data that is well within expectations and not worse, is probably a stronger driver of investors into risk assets like cryptocurrencies.
For now, retail flows into bitcoin, according to data from Glassnode, hasn’t accelerated, although institutional investors appear to have been buying the dip.