Bitcoin lately surged back towards $12,000, a mighty level that last reacted very violently to the cryptocurrency’s bullish advances and crashed its price by $1,500.
Last week, Bitcoin attempted to break the level all over again. It briefly managed to do so before plunging all over again. Only this time, the correction was less severe, finding a stable support level at around $11,500.
These price actions appear natural. Of course, Bitcoin remains one of the most profitable assets of this year. The cryptocurrency is trading more than 50 percent higher on a year-to-date timeframe. Meanwhile, its net recovery following the infamous March 2020 crash has topped 214 percent.
But behind the supersonic rallies are narratives. Earlier, it was the “halving,” an event that effectively reduced Bitcoin’s supply by half, which sent its prices upward towards $10,500. And past the May 11 phenomenon, the narrative shifted to “fears of inflation” caused by the US Federal Reserve’s open-ended stimulus programs, lower interest rates, and a knack for doing whatever it can to aid American people and businesses through the coronavirus-induced recession.
But then one has to understand what inflation means. A simple definition explains it as a rising cost of goods and services over a specific period. It means a unit of currency starts buying them lesser than it did previously.
Coffee, Gold, Bitcoin
The most common example of inflation is a cup of coffee. Back in the 1970s, you would only pay 25 cents for it. But in 2020, you are at least paying a dollar and a half to stay awake for the dirty bean water.
In some countries where inflation has gone out of control, you must pay even $250 for the same coffee cup. That means that individual central banks printed more local notes than their dollar reserves could represent, thereby pushing their currencies to collapse.
But then, we are talking about a foreign central bank, not the US Federal Reserve. The American central bank is a de facto supplier of the US dollar in the US and the rest of the world. It responds to demand. Therefore, if the Fed issues more US dollar than required, it leads the greenback lower. Similarly, an undersupplied dollar makes it more valuable against foreign currencies.
Bitcoin bulls call the Federal Reserve for its monopoly over the global currency market. They pitch the cryptocurrency as their alternatives because 1) it has a supply cap of 21 million, and 2) people can transfer it across borders without needing an intermediary to confirm, record, and maintain the transaction.
So their narrative goes like this: the Federal Reserve prints more US dollars => the greenback’s value falls => it hurts savers (Americans, other central banks) => they purchase Bitcoin instead against the dollar-led inflation => Bitcoin’s value rises.
Anyone who holds Bitcoin today should be sitting atop a gold mine, at least according to the narrative. It sees the price of the cryptocurrency hitting as high as a million dollars.
But the narrative is built on a promise of complete migration, not a cyclical run. Bitcoin bulls believe that people would dump the US dollar entire to join the cryptocurrency bandwagon. There will be no Federal Reserve in the future. People will own a part of the Bitcoin network without having to worry about inflation anymore.
A cyclical setup meanwhile sees a reshuffling of capital. People would indeed sell part of their assets to buy Bitcoin. But they would also sell those Bitcoin units to purchase something else: maybe the US dollar itself, because it would remain the go-to currency for decades to come.
That is how gold has worked so far. An ounce of the precious metal is up 2,000 percent during its lifetime as a tradable asset. But come to think of it, it was just $38 back in the 1970s, right when our parents were paying 25 cents (or 0.06578947368-ounce gold) for a cup of coffee.
From then till now, the cost of that cuppa increased by 500 percent in dollar terms. Simultaneously, you are practically paying 0.0075 ounces of gold for the same – an 88 percent inflation just for one single product: coffee.
That proves that inflation is a game of supply and demand. The reason why the Federal Reserve can maintain it below its 2 percent benchmark is the same metric. If they increase the money supply, and the dollar falls, it means wages also go up to maintain the higher cost of living.
In a way, that makes Bitcoin stronger. But the cryptocurrency gets measured in terms of dollar only. That means whether it may help reduce the cost of living for an average citizen depends on the prices of the goods and services themselves. If the demand for coffee falls, so does its prices–be it in Bitcoin or the US dollar.
Therefore, inflation cannot directly impact the price of Bitcoin. And the reason why the cryptocurrency is rising these days is based on an assumption, not practicality.
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