The U.S. consumer price index (CPI), which measures how much people are paying for goods and services, rose 4.2% from April 2020 to April 2021. According to the U.S. Labor Department, that’s the biggest one-year increase since September 2008.
Inflation is on the rise in America, which, of course, means worried investors are funneling cash into as a hedge. Right?
Actually, the price of Bitcoin is dropping. It’s down 5% today and 10% in the past month. After a fast-paced rise from just above $4,000 as the coronavirus pandemic began last March to $63,000 last month, it has cooled down to a balmy $54,600.
How does this make sense?
Because Bitcoin is capped at 21 million, it is theoretically a hedge against inflation—a safe-harbor asset that shouldn’t lose value over time. (Thus: the “digital gold” investment case.) That stands in contrast to dollars, which can be printed ad infinitum according to the Federal Reserve’s monetary policy. (There is no Federal Reserve of Bitcoin that can suddenly print more.) The Fed’s policy has been expansionist of late, as Fed Chairman Jerome Powell believed it was necessary to act aggressively amid the pandemic to fend off a long-term recession.
However, as a relatively new asset class, Bitcoin is also a speculative investment, one that can get sold off when there’s concern about the broader markets. Just check out the Dow Jones Industrial Average today, which is down 1.5% after recently reaching record highs (around the same time as BTC).
On particularly bad days for global financial markets, everything can fail, even Bitcoin. Bitcoin became more closely tied to equities after last March’s crash, and the correlation between BTC and the S&P 500 is growing over time.
When inflation fears in the US spike, rates, the dollar and financials go up, and everything else goes down, even gold. This can be counterintuitive.
— Alex Krüger (@krugermacro) May 12, 2021
Though a dip in asset prices might be a surprise, a rise in consumer prices at this precise moment isn’t. Prices plunged last April due to coronavirus, meaning goods became cheaper. Much of this month’s increase is fueled by rising prices for used vehicles, as travel restrictions led rental car companies to fire sale their fleets last year, only to buy them back this year. A semiconductor chip shortage is making things worse.
There’s also a case to be made that inflation was already baked into BTC’s price as investors anticipated this moment. That would explain Bitcoin adding $50,000 to its value in 13 months.
Gold, a much more mature asset, didn’t get such a boost. And, if it makes any Bitcoin holders feel any better, the price of gold is down today, too—but only by 0.92%.