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Bitcoin Demand to Rise on Back of ‘Unsustainable’ Deficit, Inflation, says Grayscale

Grayscale suggests that recent inflation data might have a temporary adverse effect on cryptocurrencies. However, sustained inflation could ultimately bolster confidence in digital assets.

Inflation entails a continual uptick in the overall price level of goods and services within an economy, typically leading to a decrease in the purchasing power of traditional currencies.

March saw the Consumer Price Index (CPI) surpassing forecasts, with inflation rising by 0.4% month-over-month and 3.5% year-over-year. These figures differed from the projections of Dow Jones economists, who anticipated a 0.3% month-over-month increase and a 3.4% year-over-year rise.

The notable upticks were primarily attributed to rising costs in housing and fuel, as outlined in a report from the US Bureau of Labor Statistics.

Raising interest rates serves as a strategy to combat inflation by curbing economic activity, dampening consumer spending and business investments, bolstering the currency, and reshaping expectations regarding future inflation. These combined effects work to alleviate inflationary pressures within the economy.

Consequently, the unexpected uptick in inflation has diminished confidence in the likelihood of the Federal Reserve cutting interest rates in the forthcoming months.

According to CME’s FedWatch tool, current estimates from traders suggest a mere 20.6% probability of a rate decrease in June, compared to a 45.9% chance in September.

This suggests that market analysts anticipate the US Federal Reserve maintaining interest rates at their current level throughout May and June, with the first probable rate reduction expected in September.

This extension of the economic slowdown translates to reduced inflows into assets like Bitcoin, with investors scaling back their positions. This trend was reflected in Bitcoin’s price movement on April 10th, when it dropped by 2.5% following the unexpected CPI data, though it corrected later in the day.

Historically, spikes in the 10-year real interest rate have coincided with significant declines in Bitcoin’s price.

Between December 2017 and January 2018, the 10-year real interest rate surged from 0.573 to 0.873, as documented by the Federal Reserve Bank of St. Louis. During this period, Bitcoin experienced a 28% decline.

Grayscale – Inflation Is In Crypto’s Favour

Grayscale’s managing director of research, Zach Pandl, advocated for the prevailing negative market sentiment, acknowledging that rising inflation poses a “short-term negative for crypto,” particularly as high inflation suggests that the Federal Reserve is unlikely to cut rates anytime soon.

Instead, Pandl highlighted events like the Bitcoin halving, increasing economic growth, and the expanding adoption of cryptocurrencies as catalysts that will propel Bitcoin’s price forward, stating:

“The Bitcoin halving and trends in adoption like tokenization are poised to create a supportive backdrop for crypto markets.”

Pandl’s perspective also rested on the notion that cryptocurrency stands to reap long-term benefits from heightened interest rates.

As inflation rates climb and fiat currency undergoes devaluation, store-of-value assets like Bitcoin are expected to remain highly sought after. Pandl contends that Bitcoin will continue to be a “hot commodity” as the US government persists in overspending and maintains elevated interest rates.

However, this outlook is not without skepticism. Despite Bitcoin’s consistent track record as a successful long-term store of value since its inception in 2010, its notable volatility renders it an unpredictable investment, often experiencing prolonged downturns.

Consequently, investors may lean towards less volatile assets such as traditional bonds and term deposits.

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