Author: Shane Neagle, Coingecko; Compiled by: Bai Shui, Jinse Finance
Bitcoin was launched after the 2009 financial crisis and has hardly undergone macroeconomic stress testing. This starkly contrasts with gold, which has a long history and has endured various centuries and political systems.
However, the supply of gold is pseudo-limited, which makes its scarcity unstable. New gold mines are often discovered, while Bitcoin's scarcity is mathematically precise and predictable, capped at 21 million Bitcoins (BTC). But does this mean Bitcoin is better than gold at hedging against inflation?
How does CPI affect Bitcoin prices?
On a daily basis, from the opening price of Bitcoin (BTC) on the day of the CPI report to the opening price the next day, regardless of the direction of inflation rate changes, Bitcoin prices either drop or rise. For example, when the CPI report shows that the inflation rate fell from 8.5% to 8.3% (annualized) between March and April 2022, Bitcoin prices dropped by -11%.
Conversely, after the CPI report showed that the inflation rate dropped from 8.2% to 7.7% (annualized) between September and October 2022, Bitcoin's price rose by 9.68%.
On May 2024, the day after the CPI was announced, BTC prices rose by 7.02%, showing a slight decrease from 3.5% to 3.4% (annualized). Notably, when the inflation rate in the March 2022 report spiked from 7.5% to 7.9%, Bitcoin prices actually fell by 6.37%.
In other words, the hypothetical logic regarding the relationship between Bitcoin prices and CPI announcements is not reflected in the data. It becomes meaningful once we look at the monthly changes in BTC prices and broader driving factors with greater impact.
Will Bitcoin rise or fall with inflation?
In March 2022, the Federal Reserve began a rate hike cycle to curb inflation. Considering the lag of the monthly CPI report, January 2022 will become the starting point for comparing with Bitcoin's monthly prices for two reasons:
Rate hikes have a suppressive effect on the economy as borrowing becomes more expensive.
The bill itself puts inflation as an urgent issue in the public spotlight. Therefore, this will further promote the perception of Bitcoin as an inflation hedge.
The data clearly shows that the Federal Reserve's rate hike cycle, as a means to shrink the balance sheet, has a much greater (suppressive) impact on Bitcoin prices than CPI data does. In fact, as CPI data declines, Bitcoin prices tend to rise. Considering these factors, this makes sense:
Bitcoin is also viewed as a speculative asset and a hedge against currency depreciation. This perspective arises from Bitcoin's limited use in the economy compared to the ubiquitous dollar (less than 2%).
In contrast, prior to the Fed's rate hike cycle, when money was 'cheap', Bitcoin was more likely to attract capital inflows as a higher-risk investment.
However, as the Federal Reserve continues to raise rates to curb inflation, Bitcoin's increasingly limited supply offsets this effect. As of October 2024, after the fourth halving event in April 2024, 94.13% of Bitcoin's supply is provided at an inflation rate of 0.84%.
It can be argued that Bitcoin is not just an inflation hedge tool but also a hedge against central banks. This was evident when Bitcoin rose 9.5% during the crisis in the U.S. regional banking sector.
In conclusion, compared to the underlying Bitcoin token economics, the impact of CPI announcements on Bitcoin prices is diluted. Most importantly, inflation rates above BTC inflation have been factored into the central bank's cake. This is why, even though CPI data shows a downward trend, it cannot hide the fact that after the fifth halving in March 2028, the dollar will continue to depreciate while Bitcoin's future inflation rate will be lower.
In contrast, the federal government is extremely unlikely to control spending to the extent that it leads the Federal Reserve to stop monetizing the government's ever-rising debt. Recently, it is more likely that the Federal Reserve will cut rates again, reopening capital inflows into Bitcoin, regardless of how CPI data falls.
Why do inflation reports affect Bitcoin prices?
Inflation is elusive; it is understood as the rise in prices of goods and services, typically measured by government agencies. In the United States, this responsibility falls to the Bureau of Labor Statistics (BLS) through the Consumer Price Index (CPI).
However, upon deeper investigation, inflation is best understood as the influence of the central banking system. Specifically, when the Federal Reserve ('Fed') monetizes debt to pay for government spending, central banks increase their securities portfolios. The result is an increase in the money supply, manifested as inflation.
After decades of increasing monetary plateaus to monetize debt, the most extreme instance occurred in 2020. The Federal Reserve's balance sheet expanded from $4.2 trillion at the beginning of 2020 to $7.2 trillion by mid-year. Consequently, inflation (CPI) appeared the following year as a lagging effect, peaking at 9.1% (annualized) in June 2022, the highest level since 1981.
In other words, the Federal Reserve continuously devalues the dollar through ongoing monetary expansion. Even Federal Reserve Chairman Jerome Powell finds it challenging to explain why the benchmark inflation target (the rate of dollar value erosion) is 2% and not some other percentage.
Therefore, this means the following:
The dollar is a manipulated asset, and its value has been inherently eroded.
Bitcoin is an immutable asset whose value is secured through decentralization and inherent scarcity.
Theoretically, this means that Bitcoin prices would rise when CPI reports increase and fall when CPI reports decrease. However, as explored above, this is not the case.
