Bitcoin - Is it a hedge against inflation? 🤔
By @ShtcoinResearch 📘
Bitcoin BTC BTC Crypto Inflation
Part 1/3 👇
1) This is a question that has been asked many times during the lifespan of Bitcoin, and never before has Bitcoin faced such a barrage of macro issues all slamming it at the same time.
2) Bitcoin maxis will shout out their arguments for Bitcoin, and crypto denialists and main stream media will shout out their arguments against. However, I feel that there is a line to be found in the middle.
3) It is a pertinent question, because right now, as I write this, we find an array of largely negative market forces at play; Bitcoin is facing a stress test it has never endured before, in a context it has never had to live through.
4) So, what is going on right now? What are the problems Bitcoin is facing? What is happening in the macro / geopolitical arena that is affecting Bitcoin? How does Bitcoin overcome this? And finally, is Bitcoin really a hedge against inflation?
5) What is inflation & how does it affect us? 🤔
As with most things in life, we need to understand the context if we are to delve into the answer. One needs to understand inflation and the implications thereof against the background of the global scenarios playing out.
6) Inflation is a rise in prices, ultimately meaning that there is a decline in purchasing power. Basically, a unit of currency can buy less than it could from a previous period. When inflation is high, you can buy less with the same amount of money you could, say 1 year ago.
7) This also essentially means you save less, and the situation cascades from there, as we are currently seeing in macroeconomics. 📈
8) Despite two months of relative cooling, inflation is nowhere near where it needs to be and there is real fear of a recession. The Federal Reserve has a mandate which includes an inflation target of 2%, however we just printed a consumer price inflation number (CPI) of 7.7%.
9) Admittedly, consumer prices rose slower than expected in October, but there is a real chance that recession is knocking at the proverbial door. 🙃
10) “The Federal Reserve has made it very clear they’re committed to price stability, they’re committed to reducing the inflationary pressures,” said Michelle Meyer, chief U.S. economist at the Mastercard Economics Institute.
11) “The more inflation comes in above expectations, the more they’re going to have to prove that commitment, which means higher interest rates and cooling in the underlying economy.”
12) While we have consumer prices rising on the one hand, on the other hand, wage inflation is not keeping up with actual inflation, and you can bet that people are feeling it.
13) High inflation means less worker buying power as pay has been shrinking, with average hourly earnings falling 3% between July 2021 to July 2022.
14) Additionally, over the last 6 months we have seen the fastest rate of interest rate changes ever witnessed. The record rate-increase also includes the mortgage rate, which has doubled over the last 6 months, ultimately seriously affecting people’s ability to afford a home.
15) How did we get to this point? Federal Reserve policy over the last decade undertook an approach know as quantitative easing to stimulate the economy.
16) This means that the country’s central bank purchases securities and other financial assets from the open market in order to reduce interest rates and increase the money supply, all with the intention of stimulating economic growth.
17) With quantitative easing as their strategy in hand, the US central bank bought securities, like bonds, in turn injecting more money into the economy.
Basically- Printer go brrrrrr 🖨️
18) The reaction to the COVID pandemic epidemic and subsequent lock-downs leading to a shutdown of the global economy, was massive stimulus packages, among other measures.
19) An argument can be made that quantitative easing indeed helped keep the economy afloat, however it also did come at a price; namely, the current high rate of inflation.
20) In addition, the strong US dollar hasn’t helped, with investors fleeing to the rising dollar, resulting in most assets weakening.
21) With the US Dollar Index increasing by over 17% in 2022, the dollar is strengthening due to the Fed’s hawkish monetary stance in response to the high inflation...
22) Raising federal fund rates from near zero at the beginning of 2022, to nearly 4% by November 2022. The dollar is being perceived as a safe haven currency.
23) A variety of geopolitical factors add to the cacophony of crisis the world finds itself facing, namely...
24) 👇 - Russia/Ukraine Conflict - European Energy Crisis - Destruction of business sector - Energy bailouts &money printing - Chinese Economic Crisis - US mid-term elections - Eurozone Debt Crisis - Increases in Oil prices - Persistent COVID lock-downs - Japanese Currency crisisThis post is based on this twitter thread.