Bitcoin has delivered 99.996pc deflation

On Wednesday (Thursday AEDT), US inflation data come in much hotter-than-expected. Almost immediately after the number hit the wires, bitcoin notched a record high. Coincidence?

To many, it’s not so much a chance happening as something they’d been predicting for a long time now — that the world’s largest digital asset makes for a great hedge against rising prices in the economy.

Here’s the gist of the argument: unlike dollars or any other traditional currency, the digital coin is designed to have a limited supply, so it can’t be devalued by a government or a central bank distributing too much of it.

One way to test the thesis is to plot US prices against bitcoin. Bloomberg Opinion’s John Authers has done the math: Over the last decade, the headline consumer price index has risen roughly 28 per cent, and denominating that gauge in bitcoin shows deflation of 99.996 per cent. In other words, what cost one bitcoin 10 years ago would now cost 0.004 satoshis, or a smaller unit of the cryptocurrency that now trades at around $US65,000.

Bitcoin-as-an-inflation-hedge arguments have been around since the token was created in 2009 following the great economic recession.

The premise has gained momentum as prices on everything from food to gas to housing have advanced faster and been stickier over the past few months than many economists had anticipated. Wednesday’s data showed US consumer prices rose last month at the fastest annual pace since 1990, in effect cementing high inflation as a hallmark of the pandemic recovery.

Many notable Wall Street investors and analysts have bought into the idea of using cryptocurrencies as a hedge against rising prices.

Veteran hedge fund manager Paul Tudor Jones has said in the past that he likes it as a store of wealth. Meanwhile, MicroStrategy’s Michael Saylor said the Federal Reserve’s relaxing of its inflation policy helped convince him to invest the enterprise-software maker’s cash into bitcoin.

Economists with Bloomberg Economics estimate that roughly half of bitcoin’s recent returns can be explained by inflation fears, with the other half coming from market exuberance and momentum trading.

“Our model shows that for bitcoin, the importance of inflation and hedging against uncertainty become more important drivers over time, accounting for 50 per cent of price moves in the latest cycle relative to 20 per cent in 2017,” said Björn van Roye and Tom Orlik in a recent note.

Strahinja Savic, head of data and analytics at crypto derivatives provider FRNT Financial, says another way to illustrate the inflation protection provided by bitcoin versus fiat currencies is to chart the Fed’s balance-sheet expansion versus the coin’s supply.

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