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Google (or DDG) “inflation” and you’ll find articles with headlines from basically every media outlet saying something like: “US Inflation Jumps to Fresh 4-Decade High of 8.5% in March.” That’s a big number. When inflation fear enters the conversation, investors go “risk-off,” and they pile into inflation hedges and store-of-value assets like gold and … like bitcoin?
Well then, why didn’t bitcoin’s price rocket up after the inflation print came out last week? Is bitcoin a bad inflation hedge? Is it ever going to be a store of value? For all its promise, Bitcoin’s sound money properties should predispose it toward being a useful inflation hedge and store of value. That has fallen flat. So what gives? How aspirational is the “bitcoin as a store-of-value” narrative? Are bitcoin investors screwed? Why is bitcoin acting like a tech stock?
That (and maybe more) below…
– George Kaloudis
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Prevailing economic theory is built upon three pillars: output, money and expectations. The people and groups that run economies want to increase economic output and strengthen their sovereign money against other currencies while managing expectations for the future to avoid economic downturns. There’s not enough room in a column to dive into the gory details of all of these concepts, but let’s zoom in on money, expectations and the entity responsible for those two in the U.S., the Federal Reserve, and tie it into recent inflation woes (and Bitcoin!).
The Fed has been given responsibility for monetary policy in the U.S. and aims to ensure “maximum employment, stable prices and moderate long-term interest rates.” The Fed has three levers it can pull to achieve its goal: 1) open market operations (i.e. “print money”), 2) the discount rate (i.e. “interest rates”) and 3) reserve requirements (i.e. “vault deposit rules”). Printing money (by buying bonds and “stuff”) and changing interest rates (by changing the rate it charges banks to lend money overnight) are the main mechanisms we’ve seen the Fed employ in recent memory.
And, wow, does the Fed have its hands full right now.
“Stable prices'' is a goal for the Fed, and that has historically meant an arbitrary 2% target for inflation each year, meaning the Fed wants things to cost 2% more each year. Well, last week the consumer price index, a means to measure inflation, jumped to a four-decade high of 8.5% year-over-year in March. Basically, last year’s $10 burrito is now $10.85. That is not a good thing. On top of that, year-over-year CPI metrics have exceeded 2% every month since March 2021. Inflation is clearly not transitory.