Help me understand this apparent contradiction between bitcoin and inflation

[headingnorth]

You always hear the pundits saying that the rise of inflation suppresses the price of risk assets such as stocks and bitcoin, as interest rates are pushed up in an attempt to control inflation.

But if bitcoin is a hedge against inflation then shouldn't the bitcoin price rise when inflation goes up instead of going down?
I'm guessing the answer would be that inflation causes bitcoin price to go down in the short term, but in the long term causes it to go up? If so then why?

[Charles-Tim]

I'm guessing the answer would be that inflation causes bitcoin price to go down in the short term, but in the long term causes it to go up? If so then why?

If there is inflation, the price of goods and services will increase as the fiat of the nation decline in price. Assuming bitcoin is stagnant and not moving up or down in price (but which is not possible), the price of bitcoin will rise against the specified fiat. But bitcoin is a volatile asset which can make this not known to most people.

[Churchillvv]

But if bitcoin is a hedge against inflation then shouldn't the bitcoin price rise when inflation goes up instead of going down?

This most times are biased based on your location, but when it come to global economy what makes Bitcoin price some times falls along side with the inflation is likely as a result of monetary policies taken by the federal reserve which in turn tightens the whole situation for investors and as such Bitcoin price may not or may fall only for some time (very short period) before it then makes a price correction.

I'm guessing the answer would be that inflation causes bitcoin price to go down in the short term, but in the long term causes it to go up? If so then why?

Let's say, it's because after some short period of tight monetary policies (regulations) the Bitcoin price tends to correct itself against the inflation and with investors finding solution around the situations the market will begin to set forward with it's activities and with that little price fall some investors has a taken advantage of it through buying the dips and the demand for Bitcoin increases over time so the price sky rockets for a long period.

Infact as we know Bitcoin is volatile, so after some depreciation what next is appreciation. so soon after the inflation must have cost a little price fall the next thing is price increase and it tends to last for a long time.

[DapanasFruit]

But if bitcoin is a hedge against inflation then shouldn't the bitcoin price rise when inflation goes up instead of going down?

Ideally in the minds of many, that should be the case but since we are not living in a perfect and flawless world, there are things that are subject to realities in the market and that also includes Bitcoin since it is traded in an open market like we have right now and to which anyone can freely participate in the process. Now, the idea that Bitcoin is a hedge inflation is coming from the fact that it has a limited - a fixed number of coins as against the limitless printing of fiat money as to be decided by central bankers and the government. As we have seen in the history of Bitcoin, I think it is playing that part in most of the time though it does not mean the price of BTC would not go down as, again, it is subject to the market forces moving around.

[BlackHatCoiner]

Theoretically, Bitcoin goes up when there is inflation and people conceive it as a hedge. However, this is not always the case, at least not in the short term, because there are people who view it as a luxury asset. And when inflation hits the pocket, and these people need money, then the first to withdraw is their luxuries.

That being said, on the long term it has acted as more than a hedge against inflation. Strictly speaking, though, that does not count as evidence of a long-term inflation hedge either. It does have good chances to work, though, I believe.

[bobbybkk]

You always hear the pundits saying that the rise of inflation suppresses the price of risk assets such as stocks and bitcoin, as interest rates are pushed up in an attempt to control inflation.

But if bitcoin is a hedge against inflation then shouldn't the bitcoin price rise when inflation goes up instead of going down?
I'm guessing the answer would be that inflation causes bitcoin price to go down in the short term, but in the long term causes it to go up? If so then why?

 I am just an amateur, so I am not claiming special knowledge:

As far as I know the relation between Bitcoin price and interest rates is:

Lets assume you have 1 million USD and are looking for a return of 10 % per year, you have invested in shares, bonds and real estate, nothing fancy, no Bitcoin because you consider it too risky with prices going up and down.

Now the interest rates go down, means people can easily borrow more money and because of more demand the prices are going up - means more inflation. The lower interest rate means some of your investments make a lower return. In total you maybe make only 8% per year now.

In order to improve your return you now buy Bitcoin because there is a chance to make more profit, and you are prepared to accept a higher risk in regards to Bitcoin.  So mor edemand for Bitcoin- Bitcoin prices go up....

After some time with inflation the interest rates will be set higher, to make it harder to borrow money, and less money is chasing the same amount of good, means the inflation rate goes down. But the higher interest rate means also you can now make the target 10% return on your 1 million, without holding any #risky#  Bitcoins.

So demand for Bitcoins goes down, and therefore the Bitcoin price goes down because of lower demand.

To sum it up: Inflation / lower interest rates  drive Bitcoin up     Higher interest rates drive Bitcoin down....


But there are of course other factors going into the Bitcoin price...... so this is just about inflation / interest rates.....

In Europe the target inflation rate is 2 %, so over many years inflation will add up of course....

[hd49728]

You always hear the pundits saying that the rise of inflation suppresses the price of risk assets such as stocks and bitcoin, as interest rates are pushed up in an attempt to control inflation.

FED, central banks create inflation when they need to print money to have money flow in economy. Then they 'find' solutions to control inflation, it's a joke.

But if bitcoin is a hedge against inflation then shouldn't the bitcoin price rise when inflation goes up instead of going down?
I'm guessing the answer would be that inflation causes bitcoin price to go down in the short term, but in the long term causes it to go up? If so then why?

Bitcoin is inflationary too, you must know this fact first. It is not deflationary like many people believe it is.

Bitcoin will become deflationary after 2140 when all 21 million bitcoins in total supply will be mined all by miners and available in circulation. There are some contributors for its deflationary like people lost their bitcoins like losing private keys, can not spend because of dust UTXOs, lost to scam exchanges and sent to wrong addresses ...

Price goes up because value of Bitcoin goes up with time, with more adoption, more use cases, more utility, more legality.

[ObscurePen]

Bitcoin is deflationary as it has a capped amount of coins 21mil. Supply is limited to this amount. As demand increases it will push prices up because of this fixed supply - in the long term.

When interests rates rise and the price of commodities increase people and companies are discouraged from borrowing and generally the whole economy has less to spend. Thus people and institutions are less likely to spend money on high risk assets like Bitcoin driving down demand during this period of high interest rates. Thus price decreases.

But yes in the long-run a Bitcoin will increase in value - deflationary. Whereas other fiats will ‘lose’ their individual value over time - inflationary.

[ImThour]

If I would describe it in my terms, I will say it this way - When Inflation comes up, people find it hard to invest money and most of the times are left with no money as prices of their daily needs increases compared to the previous term, so this kind of affect any asset and it also affects Bitcoin. Less buyers, Less Demand, Supply keeps growing.

[Natsuu]

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

[yudi09]

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

[franky1]

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

[EarnOnVictor]

You always hear the pundits saying that the rise of inflation suppresses the price of risk assets such as stocks and bitcoin, as interest rates are pushed up in an attempt to control inflation.

But if bitcoin is a hedge against inflation then shouldn't the bitcoin price rise when inflation goes up instead of going down?
I'm guessing the answer would be that inflation causes bitcoin price to go down in the short term, but in the long term causes it to go up? If so then why?

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.

[SamReomo]

I'm guessing the answer would be that inflation causes bitcoin price to go down in the short term, but in the long term causes it to go up? If so then why?

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.

[thecodebear]

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.

[kryptqnick]

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.

[macson]

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.

[aoluain]

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.

[buwaytress]

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.

[AnonBitCoiner]

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.