Why Bitcoin Will Flourish in a Higher Inflation Environment

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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 across financial markets, credit has tightened and investors are fleeing to the US dollar due to macroeconomic uncertainty.

The protagonist of the drama affecting global assets and damaging economies around the world is the US central bank (Fed). The financial institution has increased interest rates and reduced the balance with the aim of slowing inflation.

The Fed is mandated to keep inflation at around 2%, but for the first time since the 1970s the measure has risen close to 10% in the US alone. In other parts of the world, including top economies, inflation has become a more important issue.

Good morning from #Germany where #inflation the pressure continues to increase. 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% month-on-month. The biggest impact was the increase in the price of natural gas w/+306.3% YoY pic.twitter.com/RYMmdAfUQN

— Holger Zschaepitz (@Schuldensuehner) 7 October 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. Others, however, speculate about the permanent effect of higher inflation as central banks steer their way out of the current situation.

What is Bitcoin part of the new status quo

To achieve the latter, central banks may decide to set a higher inflation target, increasing from 2% to 4%. This weekend the economy published a special report on this possibility entitled “The end of 2”.

Crypto investment firm Cumberland commented on the article, and its impact on Bitcoin and crypto, and the world. The main task behind an increase in the inflation target is to give central banks a new tool to curb inflation. The company wrote:

by revising the target upwards (to 4%), central bankers can simultaneously construct both a budgetary windfall and an exit to the impending disinflation purge/crisis/etc. In the face of daunting (at best) or even insurmountable supply-side challenges, expecting a higher inflation target now seems like a rational starting point.

As a consequence, central banks may lose more credibility while increasing economic inequality for the global population. Bitcoin has been engineered to flourish in this scenario where central banks chose to protect the system instead of the population.

Not a hedge against inflation

Unlike some of the doomsday scenarios presented by economic experts recently, Cumberland believes this new status quo could last for decades rather than plunging the world into an immediate global fallout. In this new world, people may turn to crypto, to digital assets to hedge against central banks.

By design, cryptocurrencies and digital assets are more inclusive and universally accessible, Cumberland argues. This can lead people and institutions, even governments, to adopt crypto. This happened before.

During the COVID-19 pandemic, many people are turning to crypto and Bitcoin to send and receive money transfers, as a payment method and as an investment tool. In many countries, it was crypto and not central banks that gave people solutions.

As a result, the “hedge against inflation” narrative was born. This argument has lost steam as Bitcoin has fallen nearly 80% from its all-time high. However, Cumberland claims that crypto is not an inflation hedge.

Digital assets are a debasement hedge, a way to protect against central banks raising inflation targets and devaluing their currencies at the expense of the population. This scenario will prompt central banks and lawmakers to continue to clamp down on global markets to curb inflation.

People will pay the price for these actions unless a “deflationary technical miracle,” the firm said, comes into play. The investment company argued:

Persistent, tolerated inflation is just another form of fiat currency degradation – a backdrop against which crypto performs spectacularly. If our central banks choose the former (aggressive monetary policy), a crypto summer is around the corner. If they choose the latter, look below.