Why Bitcoin Blooms in a Higher Inflation Environment

Disclaimer: The following editorials represent the views of the authors and do not necessarily reflect the views of Bitcoinists. Bitcoinist advocates for both creative and financial freedom.

The economic conditions that allowed Bitcoin to surge from its multi-year low of $3,000 to its all-time high of $69,000 are over. Liquidity has tightened across financial markets, credit has tightened, and investors are fleeing to the US dollar due to macroeconomic uncertainty.

The US Federal Reserve (Fed) is the star of the drama affecting global wealth and hurting economies around the world. The financial institution is raising interest rates and shrinking its balance sheet to curb inflation.

The Federal Reserve (Fed) has an obligation to keep inflation at around 2%, but for the first time since the 1970s, inflation in the United States alone has risen close to 10%. In other parts of the world, including major economies, inflation has become a more significant issue.

good morning from #Germany Where #inflation Pressure continues to rise. August import prices rose 32.7% year-on-year, reaching the highest level since March 1974. Energy imports rose 162.4% y/y to +18.9% m/m. The biggest impact was the rise in natural gas prices, +306.3% YoY. pic.twitter.com/RYMmdAfUQN

— Holger Zschaepitz (@Schuldensuehner) October 7, 2022

In the crypto space, some market participants believe Bitcoin is going through a normal price cycle. A massive bull market followed by a bear market. However, some speculate about the permanent effects of higher inflation as the central bank emerges from the current situation.

What are some of the new status quo Bitcoins

To achieve the latter, the central bank may decide to set a higher inflation target, rising from 2% to 4%. The economy published a special report on this possibility this weekend, titled “The end of 2.”

Cryptocurrency investment firm Cumberland commented on this article and its impact on Bitcoin, cryptocurrencies, and the world. The main theme behind raising the inflation target is to give central banks new tools to mitigate inflation.Office I have written:

By revising the target upwards (up to 4%), the central bank can simultaneously design both a budget windfall and an off-ramp to an imminent disinflationary purge/crisis etc. In the face of daunting (at best) or insurmountable supply-side challenges, expecting a higher inflation target seems like a reasonable base case.

As a result, central banks may lose even more credibility while increasing economic inequality among the world’s population. Bitcoin is designed to thrive in this scenario where central banks choose to protect systems rather than populations.

Not a hedge against inflation

Unlike some doom scenarios recently put forward by economists, Cumberland believes that this new status quo could last for decades rather than plunge the world into immediate global impact. In this new world, people may look to cryptocurrencies and digital assets as a hedge against central banks.

By design, cryptocurrencies and digital assets are becoming more inclusive and universally accessible, Cumberland argues. This could encourage people, institutions and even governments to adopt cryptography. This has happened before.

During the COVID-19 pandemic, many are turning to cryptocurrencies and Bitcoin as a way to send and receive money, as a payment method, and as an investment tool. In many countries, it was cryptocurrencies, not central banks, that offered the people the solution.

As a result, the narrative “Hedge Against Inflation” was born. This argument has lost power as bitcoin has fallen almost 80% from its all-time high.

Digital assets are a “depreciation hedge,” a way for central banks to raise their inflation targets and protect against devaluing currencies at the expense of population. In this scenario, central banks and parliamentarians will continue to push global markets downwards in an attempt to moderate inflation.

According to the company, unless a “deflationary technological miracle” happens, people will pay the price for these actions. The investment firm argued that:

Sustained and tolerant inflation is just one form of fiat currency depreciation. This is the background behind the remarkable performance of cryptocurrencies. If our CBs choose the former (aggressive monetary policy), the crypto summer is just around the corner. If you choose the latter, see below.