Bitcoin: Maybe It Is An Inflation Hedge After All

Yesterday, the BLS released the latest consumer price inflation readings and it wasn’t pretty. Headline CPI came in at 8.2% year over year with core CPI at 6.6%. Each of these figures exceeded expectations. This is concerning because the Federal Reserve has been hiking interest rates 75 bps at a time throughout the summer months and is expected to do so again in a few weeks:

It is the hope of the central bank that this next hike will be the one that the accomplishes what others have failed to achieve; namely, reflect a meaningful reduction in consumer price inflation data. The response to the August CPI reading was a massive selloff across broad risk markets that took down equities, metals, and crypto. That selloff was the market seemingly coming to grips with the idea that the Fed couldn’t justify a rate hike pivot at the last FOMC meeting. Given that, it would stand to reason that yesterday’s higher than expected CPI reading would have resulted in the same response, yet that did not happen.

While it has given back some of its gains from yesterday’s pop, Bitcoin (BTC-USD) is still ahead of where it was before the CPI reading at 8:30 am on Thursday. This raises the question about whether the top crypto by market cap is indeed an inflation hedge after all. Bitcoin has gone through numerous narratives changes over the last few years:

• It’s a medium of exchange
• It’s digital gold (inflation hedge)
• It’s energy

To most, each of these narratives are probably absurd but I think there is one that actually might hold some weight. If we accept that the market is forward looking, then it isn’t unreasonable to give Bitcoin some credit for front-running the high CPI readings over the last year and a half.

This is the year over year change in Bitcoin with that of CPI. Because of the extremes we see in Bitcoin’s changes, I’ve put BTC’s change on a second y-axis. If Bitcoin is indeed an inflation hedge because of the fixed supply, I think this would indicate it front ran the elevated inflation from the last year and a half.

It’s possible that Bitcoin is purely a speculative trinket with no utility, no intrinsic value, and no future. I disagree with each of these assumptions. But it’s also possible Bitcoin is actually serving as an inflation hedge when we take a much wider view of it’s history. While we don’t necessarily see it right now, Bitcoin has been claimed dead after bubble pops numerous times but it’s still here and each cycle to this point has brought a higher high and a higher low.

This brings us to the key questions: why is Bitcoin still holding $19k when the macro environment would suggest it should have fallen hard again yesterday?

Furthermore, why is Bitcoin behaving more like Gold than like stocks over the last month? I think it’s reasonable to wonder if Bitcoin is starting to anticipate a policy change.

Fed Pivot? I Think Yes

Over the last few weeks, we have started to see more indications from global institutions that there will be pressure on the Fed to stop hiking interest rates. The United Nations called on global central banks to halt interest rate hikes and warned continued hiking would risk harming developing nations:

In its annual report on the global economic outlook, the United Nations Conference on Trade and Development said the Fed risks causing significant harm to developing countries if it persists with rapid rate rises.

We saw a very similar sentiment shared by the IMF as managing director Kristalina Georgieva reportedly acknowledged the Fed’s policy has an impact elsewhere in the world:

Georgieva called on the Fed to be extremely prudent in its policies and be mindful of the spillover impact on the rest of the world

More recently, Janet Yellen raised concerns about liquidity issues in the treasury market:

Treasury Secretary Janet Yellen cited concerns about the potential for a breakdown in trading of US Treasuries, as her department leads an effort to shore up that crucial market. “We are worried about a loss of adequate liquidity in the market,” Yellen said Wednesday in answering questions following a speech in Washington.

And those concerns seem to be justified as demand for US debt has been weak:

On Wednesday afternoon, the U.S. Treasury Department raffled off $32B worth of 10-Year paper. Demand was lackluster to say the least.

The US 30 year yield is now slightly under 4% and still rising. The central bank isn’t buying it and foreign investors don’t seem to be either. Something has to give.

There is zero doubt in my mind Bitcoin benefited from lockdown monetary policy. The Robinhood traders of the world who were chasing meme stocks and things like Dogecoin (DOGE-USD) with stimulus checks had nowhere else to spend it. Bars and other attractions were closed. The currency had to go somewhere and a lot of it went into stocks and crypto. That tailwind isn’t likely coming back again any time soon. But to dismiss the increasing network adoption of Bitcoin as just another speculative frenzy would be short sighted in my view.

Conclusion

The Bank of New York Mellon (BK) is the latest financial institution to give Bitcoin a stamp of approval as it is going to allow clients to hold it. Bitcoin is a borderless, permission-less asset that actually has protected investors from inflation if your time horizon is long enough. Gold, which I’m a huge personal advocate of, is not going anywhere. These two things are, and have always been, complementary. The key is timing your entries into these assets properly. It would be easy to say Bitcoin has performed terribly in a high inflation environment because anyone who bought it at $60k is underwater. This is true.

However, you could apply that exact logic to Gold as well, which like Bitcoin, front-ran the consumer price inflation from the last year and a half and has performed terribly since March. The dollar has been strong. It has been eating everything in its path. That includes foreign currencies, metal, crypto, and equities. But the dollar’s run is almost over in my view. There is pressure from the rest of the world for the Fed to stop hiking and I believe the central bank will oblige sooner than many others do. The Bank of England has already proven inflation can be fought until it can’t. If you believe the market is forward looking, I think it’s telling you something right now.