Dramatically high inflation is the strongest bullish argument for Bitcoin, a cryptocurrency that presents itself as the safest insurance against a potential increase in consumer prices and fiduciary devaluation caused by the central banks’ quantitative easing programs and the trillions of dollars government in stimulus packages.
But on Tuesday, Bitcoin faced a headwind as it tried to continue its year-high high. The cryptocurrency fell amid Jerome Powell’s testimony to Congress, in which the Federal Reserve chairman emphasized that the $ 1.9 trillion stimulus package will not lead to an unwanted increase in inflation.
“We can see some upward pressure on prices. Our best view is that the effect on inflation will be neither particularly large nor persistent, ”Powell told lawmakers.
Bitcoin is attempting a recovery move from its intraday low. Source: BTCUSD at TradingView.com
Bitcoin …
… I was trading almost $ 56,000 before Mr. Powell’s testimony. But the cryptocurrency came under pressure after the governor’s comments on inflation, pointing to short-term nervousness among traders who based their bullish theories on higher inflation.
This is due to the main characteristics of Bitcoin. The cryptocurrency comes with a limited supply limit of 21 million tokens, which is halved every four years due to a pre-programmed algorithm in its source code.
This makes Bitcoin demonstrably scarcer than gold, its biggest rival in the haven market, and the US dollar, the global value reserve, which has weakened by about 12 percent from the March 2020 high in response to the excess Federal Reserve’s monetary laxity policies and trillion dollar stimulus packages from the US government.
BTC / USD increased by more than 600 percent in the same period. Meanwhile, the pair’s rise also coincided with a peak in the 10-year equilibrium inflation rate – from 0.63 percent in March 2020 to 2.29 percent on March 23, 2021. The reading was above the Fed’s 2 percent inflation target, a point at which it would destabilize its loose monetary policies, raising benchmark rates.
The equilibrium inflation rate represents a measure of expected inflation derived from 10-year Treasury bills with constant maturity indexed to 10-year inflation. Source: FRED
Last week, Fed officials declared at the end of their monthly policy meeting that they would tolerate interest rates close to zero by 2024. This, coupled with Powell’s commitment to controlling inflation, indicated a lesser likelihood of dramatic price spikes to the consumer, which can strengthen the US dollar and curb bitcoin appetite among investors in the United States.
Dissenting opinions
The creator of the Stock-to-Flow model, known by its pseudonym PlanB, referred to a quote from the European Central Bank. He said central banks have room to expand their asset purchase programs (also known as quantitative easing) because their inflation rates are already too low.
“That means more pandemic emergency buying programs,” noticed Plan B. “This is good for Bitcoin.”
The analyst expects the cryptocurrency to reach $ 100,000-288,000 in 2021. Other countries hit by inflation (read turkey) may also increase global demand for Bitcoin compared to declining supply.