Disclaimer: The following opinion piece represents the views of the author and may not necessarily reflect the views of Bitcoinist. Bitcoinist is an advocate for creative and financial freedom alike.
The economic conditions that allowed Bitcoin to skyrocket from a multi-year low of $3,000 to an all-time high of $69,000 are over. There is less liquidity in financial markets, credit has tightened and investors are fleeing to US dollars due to macroeconomic uncertainty.
The main protagonist of the drama that affects global assets and harms economies around the world is the US Federal Reserve (Fed). The financial institution has been raising interest rates and reducing its balance sheet with the aim of curbing inflation.
The Fed is mandated to keep inflation around 2%, but for the first time since the 1970s, the measure has soared close to 10% in the United States alone. In other parts of the world, including major economies, inflation has become a more significant problem.
good morning from #Germany where #inflation the pressures continue to mount. Import prices were 32.7% higher in August year on year, the highest increase since March 1974. Energy imports were 162.4% more expensive year on year, +18.9% mom. The greatest influence was the increase in the price of natural gas w/+306.3% YoY pic.twitter.com/RYMmdAfUQN
— Holger Zschaepitz (@Schuldensuehner) October 7, 2022
In the crypto space, some market participants believe that Bitcoin is going through its normal price cycle; a massive bull run followed by a bear market. However, others speculate on the permanent impact of higher inflation as central banks move away from business as usual.
What is Bitcoin’s part in the new status quo?
To achieve the latter, central banks could decide to set a higher inflation target, moving from 2% to 4%. This weekend, Economy published a special report on this possibility titled “The end of 2”.
Cryptocurrency investment firm Cumberland commented on the article and its impact on Bitcoin, cryptocurrencies, and the world. The main thesis behind an increase in the inflation target is to provide central banks with a new tool to mitigate inflation. the signature wrote:
by revising the target higher (to 4%), central bankers can simultaneously engineer both a budgetary windfall and a way out of the impending purge/disinflationary crisis, etc. Faced with daunting (at best) or even insurmountable supply-side challenges, expecting a higher inflation target now seems like a rational base case.
As a consequence, central banks could lose more credibility while increasing economic inequality for the world’s population. Bitcoin has been designed to thrive in this scenario where central banks chose to protect the system rather than its population.
Not a hedge against inflation
Unlike some of the catastrophic scenarios put forth by economic experts lately, Cumberland believes this new status quo could last for decades rather than plunge the world into an immediate global crisis. In this new world, people could turn to cryptocurrencies, digital assets to protect themselves from central banks.
By design, cryptocurrencies and digital assets are more inclusive and universally accessible, Cumberland argues. This could drive people and institutions, even governments, to adopt cryptocurrencies. This happened before.
During the COVID-19 pandemic, many are turning to cryptocurrencies and Bitcoin to send and receive remittances, as a payment method, and as an investment tool. In many countries, it was cryptocurrencies and not central banks that provided people with solutions.
As a result, the “inflation hedge” narrative was born. This argument has been losing steam as Bitcoin is down nearly 80% from its all-time high. However, Cumberland claims that cryptocurrencies are not a hedge against inflation.
Digital assets are a “debasement hedge”, a way to hedge against central banks raising inflation targets and devaluing their currencies, at the expense of their population. This scenario will cause central banks and policymakers to continue to push global markets down to mitigate inflation.
People will pay the price of these shares unless a “deflationary technological miracle” kicks in, the firm said. The investment firm argued:
sustained and tolerated inflation is just another form of fiat currency debasement, a backdrop against which cryptocurrencies perform spectacularly. If our central banks choose the former (aggressive monetary policy), a crypto summer is just around the corner. If you choose the latter, look below.