Bitcoin: The Bull Run Will Begin Once Inflation Expectations Turn (BTC-USD)

Torsten Asmus

Exploring the relationship between Bitcoin and inflation

The prices of just about everything — gas, groceries, housing, cars, clothes, even televisions — have skyrocketed in the last two years. Inflation, which had been barely noticeable for decades, is suddenly the number one concern most people have about the economy.

Not long ago, prominent investors and hedge fund managers like Paul Tudor Jones, Ray Dalio, and Stanley Druckenmiller supported the thesis that Bitcoin (BTC-USD) would be a good hedge against the “Great Monetary Inflation”, May 2020 study At the time the study was published, Bitcoin was below $10,000 and a notable bull market had begun that brought the price of Bitcoin to almost $70,000 in 2021.

We can see the effects of what Paul Jones was referring to in the two charts below provided by the Federal Reserve Bank of St. Louis:

*Fed balance sheet expansion during the COVID crisis by a factor of 2.

*M2 expansion of 25% YoY, a measure not seen since the 1960s.

FED Balance Sheet Expansion

FED Balance Sheet (

M2 % YoY

M2 (

In 2022 we are experiencing an environment of high inflation that is forcing central banks to act and raise rates at a historic rate. Consumer prices are rising at a rate we haven’t seen since the 1980s. Inflation that should have been transitory, according to Fed officials, is becoming more persistent and more severe.

In this environment, Bitcoin has performed poorly, falling 70% from its highs. This opens the debate again: Is Bitcoin a hedge against inflation or not?

Realized vs. Expected Inflation and the Relationship to Bitcoin

Realized Inflation

While the CPI (Consumer Price Index / ie realized inflation) is a good measure to look at realized inflation, it is not necessarily a good indicator for the future. Historically high CPI numbers are met by rising fed funds rates, slowing economic activity. These rate hikes are intended to reduce inflation. The Fed and other central banks, quoting Bloomberg: ‘from Ulaanbaatar to Washington’, have declared the fight against inflation and the market rules out a more restrictive monetary policy for the coming months and years.

While the IPC rate and Bitcoin moved in sync during 2021, this relationship broke in early 2022. We can see from the chart below that Bitcoin’s parabolic move from $10,000 to its all-time highs was reflected in the takeoff of inflation from the 0% line, but the correlation could not hold in 2022.

Bitcoin (orange).  Inflation-CPI (black).

Bitcoin (orange). Inflation-CPI (black) (

Conclusion on Realized Inflation Rates: Using the realized inflation figures (CPI data), we can conclude that Bitcoin has not been an effective hedge.

Expected Inflation

A still imperfect but possibly better alternative to analyze the relationship between inflation and Bitcoin is to focus on the inflation expectations embedded in the US Treasury market or the so-called equilibrium inflation rates. These rates are the market’s expectations of future inflation. They tell us that inflation will fall and stabilize in the 2% region (chart below). Similar expectations can be found in surveys of economists (Bloomberg, September 2022). According to them, for the first quarter of 2024, inflation is expected to average 2.4%, inching closer to the central bank’s 2% target.

The M2 YoY (chart that we have posted at the top) confirms this possibility. In a historical context, a rapid decline in M2 expansion has been followed by contracting inflation, which is understandable.

itcoin (orange).  Inflation expectations (black).  Correlation (grey)

Bitcoin (orange). Inflation expectations (black). Correlation (grey) (

As inflation expectations rose sharply in late 2020 and 2021, the price of Bitcoin largely remained in lockstep. Since then, waves of inflation expectations have been reflected in the price of Bitcoin in a correlated way. Although the relationship is not perfect, it is still significant. The correlation between the two is largely positive and is represented in the graph above in the gray area. In short, the price of Bitcoin is falling in 2022, as inflation expectations have been falling.


We are experiencing a higher inflation environment with Bitcoin price falling. Looking in the rear view mirror (realized inflation: CPI), Bitcoin is not a good hedge against inflation.

But investors need to focus on the way forward. By measuring and tracking inflation expectations, we can see that the relationship between Bitcoin and inflation has been strong and is still intact. A slowdown in inflation expectations in 2022 with a consequent fall in the price of Bitcoin.

Forward Looking Statements: The rapid slowdown in M2 supply will have the desired effect of reducing inflation by slowing down the money supply and economic activity. At this point, it will most likely only be a matter of time until we see the CPI (realized inflation) come down to pre-pandemic levels. We even see the possibility of the inflation rate falling below the 2% line. After all, why should inflation magically drop to the 2% level and then level off? Since monetary policy has a sizable lag effect, we’re arguing that the Fed is overdoing it with its rate hikes, similar to how it overdid it with rate cuts and QE during the post-pandemic era that spawned an abundance of M2 supply with higher inflation as a consequence.

In the coming months, the Fed will move from restrictive to accommodative, reversing the sharp decline in M2 growth. At that point, inflation expectations and the price of Bitcoin will become compatible again and we could see both tend to go higher.

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