Bitcoiners have been warning of high inflation for years as a result of the accommodative policy of central banks. After the global financial crisis of 2008, central banks around the world cut interest rates to absolute zero and below. You can simply see the interest as the price for capital. The lower the interest rate, the cheaper it is to borrow money for your business or other things. By lowering interest rates, central banks therefore stimulate investment in the economy so that things can keep going if things go wrong. The downside of low interest rates is that a lot of new money comes into circulation at the expense of the purchasing power of that money.
Bitcoin (BTC) has a maximum of 21 million units and in theory is therefore the ideal protection against inflation. How is it possible that the bitcoin price is just ailing when inflation reaches record highs? There are a few reasons that we briefly examine in this article.
Inflation has already happened
The inflation that we are currently seeing in the supermarket, housing market and energy prices is the result of years of stimulation of the economy with cheap money by central banks. The money creation has already taken place and that is now starting to translate into the general price level. The price inflation that we now see is the result of the inflation of the money supply in recent years.
Bitcoin really shined in the years of money supply inflation between 2009 and 2022. Now we are dealing with price inflation and people have to pull out all the stops to make ends meet. Right now there is just as little room to invest and people feel the pain of money creation. Bitcoiners who have been preparing for this for years are relatively warm. The bitcoin price may be having a hard time right now, but price inflation may open the eyes for many people to store part of their savings in the absolute scarcity of bitcoin in the future.
Bitcoin behaves like a risk asset
Besides the fact that inflation has already taken place and bitcoin has “benefited” in recent years from the money printing of central and commercial banks, not everyone invests in bitcoin for the same reason. While a large proportion of bitcoiners have bought into the idea of never selling again and using bitcoin as their ultimate means of savings, there are also many investors who view bitcoin as a tech investment. A kind of stock that you can compare with Google, Apple, Amazon and Tesla, whereby bitcoin behaves in part in the same way as these assets.
For this reason, the correlation between bitcoin and the Nasdaq 100, the American tech exchange, is high and the prices of both have been moving quite in sync for a long time. Like the Nasdaq 100, the bitcoin price is faltering because people are looking for cover in the “safe” dollar because of the rising interest rates. Once these people have exited the bitcoin market, bitcoin will likely begin to behave more like a safe haven again. If the tech investors, so to speak, are out of bitcoin, bitcoin will again behave like a risk-off asset. An asset that is completely separate from the traditional financial markets.