What Everyone Gets Wrong About Bitcoin and Inflation

I always say that the status quo is not static and that those who assume that every tomorrow will look pretty much like every today are making a big mistake.  

Well, let me tell you a story… 

Last weekend, I was in Atlanta speaking at an International Living conference, and in one of the Q&A sessions, an attendee wanted to understand bitcoin and inflation.  

Mainstream media outlets have been widely panning bitcoin as a failure when it comes to its role as an inflation hedge—one of the benefits the cryptocurrency supposedly offers. 

And their point—while wrong—is understandable.  

As inflation began to rage this year, bitcoin was sinking. Which, on the face of it, would seem to imply that bitcoin has been a lousy inflation hedge. 

Until, that is, you shift your viewpoint. 

Here’s my argument, which I will back up in a moment: We are in a new, modern paradigm and yesterday’s way of defining an inflation hedge doesn’t fly in an age when information moves in real time. 

Let me explain what I mean… 

The Federal Reserve spent much of last year telling the world that inflation was a temporary, short-lived phenomenon. “Transitory,” Fed officials called it. 

But inflation was obviously going to be a problem in the wake of the COVID pandemic, when governments around the world were pouring cash into consumer and business hands in outrageous amounts to keep entire economies from collapsing.  

In that moment, as I told the conference crowd, “bitcoin stood up and said, ‘Hold my beer…’” 

I went back and looked at the historical record. COVID landed in America in February 2020. By March, the government had launched the largest bailout in U.S. history—$2 trillion—to help keep consumers and business alive as the economy ground to a near-complete halt. 

In that same month, bitcoin bottomed at just under $3,900…and then went on an epic run that saw it top out at $69,000 in early November 2021. 

By then, however, inflation was running at its highest levels since 1990 and the bond market was beginning to react. Bond prices fell on expectations that inflation was going to force the Federal Reserve to move off of its message across most of 2021 that inflation was “transitory.” 

Indeed, minutes from the Fed meeting in October 2021 (released in early November) show Fed officials noting that “inflation is elevated,” and that the unworried Fed would allow inflation to run hotter than its long-stated 2% goal. 

Until that point, bitcoin had been biding its time, hanging around in the mid- to high-$50K range, waiting to see how the Fed would react. The slip into that price range was, in hindsight, bitcoin telling us it saw the likelihood of the Fed having to move off of its transitory stance. 

Days later, in early December, Powell told the House Financial Services Committee that the Fed can’t be sure inflation will slow in the second half of next year. On that day, bitcoin fell out of bed. 

The granddaddy of crypto, then at $55,000, began to collapse on Powell’s announcement. It was the first indication that the Fed was shifting from passive to aggressive in its approach to inflation.  

In short, bitcoin rightly predicted that the Fed was about to begin taking money out of the system and would quite likely begin raising interest rates—moves that are deflationary in terms of money flowing through the economy, the opposite of what drove bitcoin to record highs. 

When the Fed released its November policy statement in mid-December, the language had in fact changed to reflect the Fed’s new inflationary worries: “In light of inflation developments and the further improvement in the labor market, the Committee decided to reduce the monthly pace of its net asset purchases…” 

Since then, as the Fed has continually pulled money out of the system and hiked rates aggressively, bitcoin has fallen.  

But the entire process from March 2020 to the end of 2021 proved that bitcoin is, in fact, an inflation hedge. It’s just an inflation hedge from a different perspective. It’s an inflation hedge that predicts and moves in real time.  

When it was clear that inflation was coming, bitcoin soared to all-time highs. Those who bought at the lows and sold at the highs saw their money increase nearly 18x as inflation increased from 1.5% in March 2020 to 7% in December 2021. 

Then, when the Fed began deflating the amount of cash in the economy, bitcoin reacted just as it should by falling. 

Now? 

Well, since July 1, bitcoin is acting a lot like it did at the end of 2021. It’s just hanging around. But instead of being down marginally on expectations that the Fed will continue its rate-hike mode, it’s up marginally, about 6.2%, on expectations the Fed will reverse course. Meanwhile, stocks, as defined by the S&P 500 are down 9%. 

Why? 

While stocks are signaling a recession ahead (which hurts corporate profits), bitcoin is signaling that it expects the Fed will likely curtail its interest-rate aggressiveness…and that in doing so, the Fed will essentially concede that inflation is here to stay.  

Which means…bitcoin is very much an inflation hedge.  

It’s just an inflation hedge unlike any we’ve ever had before because it’s not lagging. It functions (and predicts) in real time, 24 hours a day, 365 days a year.  

At its meeting next week, the Fed will most likely raise rates again by 0.75 percentage points. But when the minutes from that meeting are released in December, I won’t be surprised to read that the Fed is having a change of heart about its overall policy and sees the need to slow the pace of interest rate hikes. 

If so, that’s going to tell us that bitcoin is, indeed, right. 

And it will mean that bitcoin at current levels is a bargain…that persistent inflation is now baked into our future and that the moment the Fed concedes this point bitcoin is going to surge past its previous all-time high and likely surpass six figures. 

Next year could be a wild one for bitcoin.