Topic: Help me understand this apparent contradiction between bitcoin and inflation - page 2. (Read 440 times)

No asset follows inflation perfectly, look at real estate, real estate is an asset that historically follows inflation, but like any other asset it has its own dynamics and it can move independently from it.

Bitcoin is the same, during the pandemic the inflation all over the world grew, and while bitcoin at the beginning went down in price, eventually it recovered and even now is way above its price before the pandemic, so I would say that even if bitcoin is not a perfect hedge against inflation, it does a good enough job if you ask me.

That's the thing. Bitcoin is highly volatile, and it just usually decline during the start of inflation because we can't stop people from panicking during the early stage of inflation. There are people panicking, selling Bitcoin because they need to use it to buy their essential goods. And because of inflation, people tend to hoard goods that can last for a month or longer. When you buy that, you need more fund for big purchases. That's why some tend to sell what they are holding. And that's the reason why at some point Bitcoin can be affected by inflation. But after the panicking stage, you would see changes in the price since people have already adjusted.

The problem with Bitcoin is really the extreme nature of price swings. If you invest 1 Million USD in Bitcoin now  to buy a house in 5 years time, you have no idea what the price of Bitcoin will be in 5 Years in USD maybe double what you paid or maybe only half of it..... If you really need cash in USD at a specific point in time, Bitcoin can cause you some issues..

Think of Bitcoin kind of like digital gold. People buy gold to protect against inflation, right? It keeps its value when regular money might lose it. Some folks see Bitcoin the same way - a shield against inflation because there's only so much of it and no one controls it. But here's the catch - Bitcoin's price jumps around a lot more than gold. So while it could be good against inflation, its rollercoaster prices make it a bit of a wild card.

As someone already said, it is not inflation that cause the price to go down but it is market demand. Bitcoin as now still used by few percentage of population, and mostly as speculative asset. Other asset like gold doesnt experience many crash because it is already used by more people and more use than just speculative asset so they bring more stability to the price

That is basicly the job description for a lot of people working in the financial industry

Well, it's a well known fact Bitcoin adoption increases in determined regions where inflation is out of control. We have already seen it in Venezuela, Nigeria and more recently in Argentina. However, such markets don't have potential to leverage Bitcoin's price too much, so we don't see a big difference in BTC price. There are other major events happening in the world which can influence BTC's price much more than adoption in high inflated countries.

Another situation is what we have seen in the USA during the bearish crypto market, when interest rates were being raised in order to try controlling inflation. It had a negative impact on crypto market, as investors took their funds out from crypto to invest in other niches through traditional markets.

The reading I make of this, is that even when the financial situation of a country looks pretty bad, there are always people profiting from it somehow. Where some see a problem, others see an opportunity. If big players spot a profitable alternative outside crypto industry, they don't mind dumping it to the bottom in order to take advantage of something else. And once the alternative they went for isn't that profitable anymore, they just bring their funds back to crypto and pump it again. For these people who really impact the market with their orders, it's mainly about seeing inflation as an opportunity to speculate and make extra profit.

It doesn't work like that in a decentralized digital network like bitcoin, inflation is an entirely different thing and doesn't affect the way bitcoin operated in its decentralized way.


this is by our mere ordinary saying with mouth, which is obviously far from the way it works, there are different as bitcoin is inflation proof and there's not how we can compare the two together.


but what if not, the reverse is the case for them both.

Okay, it's time to get real for a moment.

US inflation peaked at about 9% annually during the post-pandemic economic disruption, and is now down to something like 4%.

Bitcoin has fluctuated by about 300% in the last two years.

Bitcoin is a "hedge against inflation" in the same was that betting on horses is a "hedge against inflation". This might be true in some narrow context, but not in the way people generally use that terminology.

When the dust settles, anywhere you put your money is an 'investment' which includes US dollars, Bitcoin, cryptos, land, gold, shares of AAPL, baseball cards, or anything else you think people might find more valuable in the future than they do now.

The price of bitcoin is not effected by bitcoin but people can take help from it during inflation, to maximise his earning to handle the expenses during inflation. The actual things which effect the price of bitcoin is the wrong or true information which are spreading all around the globe as well as the demands for bitcoin.

It can be possible that if demands for bitcoin increase then price of bitcoin will increase no matter this happen during inflation or not. May be once there happend these situations when during inflation price of bitcoin was reduces but I don't think that all the time it happens because bitcoin is not controlled by anyone and it goes ups and downs irregularly.

Oversimplified way is to see what's happened with the US dollar (since it's what Bitcoin's popularly priced). To curb inflation, the US raises interest rates. In the short term, this encourages investors to shore up more wealth in the dollar, high interest rates make it attractive, more so than Bitcoin.

Long term, interest rates either don't hold, or doesn't hold up to inflation.

Let's take a 1 year vs 10-year look. $100 in 2013 but with 5% PA interest rates is $105. So even if something cost 3% more in 2014, it's still a pretty good gain, something not likely with Bitcoin. But over 10 years, inflation probably outstrips interest over the period. Bitcoin, however, performs very well over 10 years -- there's your hedge.

Now use almost any other currency in the global South and you'll see an even wider gap between interest and inflation. Argentina recently put up  interest rates to beyond 100%! Sounds great to double your money in a year, but inflation has overtaken it by many degrees.

also something to consider is the "Timeline" of the Bitcoin market. If we zoom in on any
day or week the chances are there will be a short term trend downwards but if we
zoom out its plain to see that the Bitcoin market is on an upward trajectory.

Why? because of what franky1 posted, Bitcoins 4 year cycle and the built in halving
of the supply every 4 years. This alone is a contributing factor to Bitcoins deflation and
is the opposite to what governments do to try and control inflation - print more and more FIAT.

you have to understand that the increase or decrease in Bitcoin prices does not depend on inflation, but market demand for it or when there is positive or negative sentiment; these things will affect the price of bitcoin directly. but why do people say that bitcoin is an asset that is resistant to inflation? You can see the history of bitcoin, starting from the year it was first launched until now, the price trend has increased significantly and it has beaten global inflation, which is what makes people say that bitcoin is an asset that is resistant to global inflation.

I've found this article to be helpful when it comes to the op's question. It mentions that Bitcoin can actually go up when fiat inflation is on the rise because of people trying to save their money from devaluation that comes with fiat inflation. But it also explains the idea behind the prices of assets and perhaps cryptos as well going down in price, as a reaction to US Fed policies. For more info on that, I suggest this article. Basically, the idea is that when the Fed lower interest rates, it makes borrowing money cheaper and encourages investments, and vice versa (although the article says that the assets tend to lose value, apart from those in the financial sector). So these are just tendencies, it doesn't always work like that. And Bitcoin is different from typical assets, so it doesn't always correlate with what happens to the stock market in general.

OP, it was more the Fed interest rate raises that suppress Bitcoin's price than inflation.

First, you need to understand that any short term movements in the price of any asset is purely based on the psychology of market participants. This overrides fundamentals when we're talking short term, but of course fundamentals are the primary driver of long term growth. Hence why Bitcoin has a big crash every four years despite its fundamentals making it obvious that its price is going to be much much higher in the future. The market doesn't have very good long term sight.


Add to that the fact that most people don't even know what Bitcoin is. Even lots of people IN the bitcoin market don't understand that it is hard money. Lots of people just consider it something akin to a high-growth "risky" tech stock, heck sometimes I still see articles refer to Bitcoin as a stock lol. And what do people do with "risky" investments when the Fed raises interest rates? They dump them. Why do they dump them? Because borrowing gets more expensive as interest rates go up, so companies generally do less borrowing, and therefore take on fewer business growth plans while interest rates are high, which means less expected growth in the near to medium term future. Hence why stocks fall when interest rates go up. Of course Bitcoin is not a stock and is not one bit affected by interest rates. But as I already, most people don't understand what Bitcoin is, and in fact they think it is basically a high-growth risky tech stock. So that's how they treat it as an investment, and they dump it on interest rate raises even though those raises have no effect on Bitcoin.


Yes inflation of USD makes Bitcoin more valuable, but the market psychology of the moment is going to override that in the short term. And even more so the response to high inflation - high interest rates - drive Bitcoin's price down because people treat Bitcoin (right now) like something it is not, like a risky tech stock rather than a very non-risky hard currency. Of course long term if inflation stayed high we would indeed see that positive effect on Bitcoin's price. But if we're talking about just a year or two of high inflation (as we saw in real life recently) that's a short term scale, and the inflation wasn't high enough to really affect Bitcoin's price. If it had been hyper inflation then we definitely would have seen the result in a vastly increasing Bitcoin price because then people would be dumping the hyper inflating currency to get into one that isn't - Bitcoin.



Just always remember, asset markets are driven entirely by the psychology of market participants. In the short term it is very reactionary, driven by fear and greed and this overrides fundamentals. In the long term, fundamentals of the asset smooth out the fear and greed of the market and become the primary driver for growth (or collapse or stagnation) of an asset.

Nope Bitcoin value won't get impacted a lot by inflation but surely in short term it will get affected to some extent. The main reason for that short term value drop of Bitcoin can be because of worldwide inflation, when inflation takes place all over the world then fiat will lose its value and those people who hold Bitcoin might end up selling some of their holdings if they need cash and that causes Bitcoin's value to go down.

But, after that short term value drop Bitcoin won't lose its value again by a lot, however Bitcoin is known to be volatile and it can still sometimes get those dips of value. When inflation gets hugely high and people hardly manage to fulfill their daily need then again Bitcoin price won't go up a lot. However, Bitcoin won't lose as much value as fiat currencies will lose, and that's why you can consider it as deflationary in such times.

I appreciate this question and observation, and the answer is not far-fetched at the same time. What I realise is that people overrate Bitcoin, and this is for obvious reasons, the coin has survived well during thick and thin moments over time and it has moved in thousands from where it started. But people forgot that the Bitcoin of 2010 is not the Bitcoin of now, the price is so high now, that there is no way it can effectively hedge inflation as they say. If you buy your Bitcoin today, you might not see it higher than x2 in the next 2 years. But what if inflation is worse than that in your country? The inflation we talk about too depends on the country we are talking about, and like in my country, inflation is "worst" now. To the extent that if there is anything that can be more qualifiable than worst, that is what I would use it for.

Let me give you a clue. In the last 3 years, the price of commodities has grown between 5-8 times what they used to be due to inflation. Can Bitcoin help me to stabilise it even if I bought the coin 3 years ago? That is not possible. If the inflation is more bitting than how the value of Bitcoin appreciates, it will not be able to hedge anything, though it may try, but it could be futile. This can be worse if it is the bearish season of Bitcoin. You could imagine those who bought Bitcoin when it was at $60,000 in the view that it is a hedge against inflation. By now, it would have been worse for them because, the inflation in their country would be bitting, while again, the Bitcoin they invested in which was supposed to be the hedge against the inflation is still losing their money. What a double punishment!

This means that what people mostly say about Bitcoin is not true, they are only overemphasing on the general saying. This is practical.

bitcoin has its own economic time table of deflation which is based on a market cycle of 4 years..

FIAT time tables of inflation are based on 3-6-12 months between each government budget report

bitcoin does not peg or shadow a fiat. so they dont resemble each other economic policy or fud reports

When the prices of goods and services increase, wallets are drained and consumers' purchasing power decreases due to this factor. Due to this situation, the value of the currency will decrease.
Bitcoin supply is 21 million, no more and no one can plan to reduce. When inflation rises, Bitcoin also experiences a decline in the short term, but in the long term, Bitcoin is able to survive as a better asset.

The two sources below can be used as references to make things easier.
1. Bitcoin and inflation: Everything you need to know
2. Inflation and Deflation of Price and Money Supply

So when inflation kicks in, it can initially make people jittery about risky investments like Bitcoin. Short term it might dip but some people see Bitcoin as a kind of inflation-proof stash over the long haul. Limited supply and its decentralized vibe make it appealing as a store of value, which could lead to growth over time. So yeah it might go down at first, but some see it as a winner in the long run