Bitcoin Trend Reversal and The Effect of Inflation
This month has broken out of recent Bitcoin trends, but we are still able to find strong support at the 0 level of the Fibonacci channel, as seen in the below chart. We hit a high on May 10th and have dipped through today. I believe Bitcoin's lower high and earlier than usual dip is a result of international fears regarding inflation. Inflation scares many retail and institutional investors into withdrawing their funds from the market. In the case of cryptocurrencies, money is withdrawn due to it being an investment for many, but diluted fiat currency prices inevitably increase their value. This is due to the fact that the majority of cryptocurrencies have a finite number of coins that can be produced. There are currently 18.7 million Bitcoins in existence and through mining there will eventually be 21.0 million Bitcoins in existence in the year 2140. If you look at the US Dollar, we create trillions more dollars every decade.
Inflation is defined as the general increase in prices and fall in the purchasing value of money. Two factors have primed most of the world for considerable inflation rates, and we will focus on specific details related to these causes within the US. The first cause of inflation occurs when money supply is dramatically increased. For the past decade, the US government has been printing close to 1 trillion dollars each year to cover budget deficits and the country was wholly unprepared for the Covid-19 pandemic. The pandemic resulted in the US government passing several stimulus packages worth trillions of dollars, while they were taking in less tax revenue than in previous years. The money to cover these items was printed (created since much of the money is no longer paper money), thus vastly increasing the supply of US dollars. As can be seen in the below chart, 21% of all US dollars in existence were created in 2020 and we printed approximately 4.5 trillion dollars that year.
The second primary factor driving inflation is known as "demand-pull" inflation. Essentially this is when a surge in demand for goods outstrips supply and prices of the goods increase. Many people were out of work in 2020 and several goods were in short supply and/or not produced. Everybody remembers the lack of toilet paper and hand sanitizer, but what many didn't notice is that lumber and paper mills shut down. Anybody shopping for lumber during the pandemic likely noticed that the prices almost doubled at Home Depot and Lowes and the prices have not dropped since the increase. Food and household items have experienced a significant reduction in supply since the start of the pandemic, and the resulting inflation has caused a snowball effect, requiring the government to pass more stimulus packages to help citizens and therefore print more money to cover them.
The winners of this situation are the already filthy rich oligarchs like Jeff Bezos, whose operations did not shut down even though many of his competitors, such as brick and mortar businesses, were required to. Small businesses shutting down and people not working exacerbated the already painful plague prevalent across the globe known as wealth inequality. To add insult to injury, the major corporations who's operations did not shut down reads like a list of corporations who don't pay taxes in the US thanks to massive tax loopholes created for said companies. For the record, Amazon has not been on this list since 2018. They decided that the negative publicity was not worth the savings, so they paid 1.2% in 2019 and 9.4% in 2020.
While most nations are experiencing inflation due to the increase of money in circulation and demand-pull, The US printed more money than many other major nations. As can be seen in the chart below, US dollar supply increased over 30% in the US, double that of Europe. This has a global effect due to the fact that nations use the US Dollar in a similar way as gold stores are used. These countries have purchased US treasury securities such as bonds, since it is a stable currency to hold and back their own currency and reduce inflation. In fact, more than 61% of all foreign bank reserves are in US dollars.
In case you are not yet convinced that the world is in dire straits, I present the below chart of debt to GDP ratio. GDP, or gross domestic product, is the total value of goods produced and services rendered in a country during one calendar year. Most of the nations in this chart have a debt to GDP Ratio of over 100%, meaning that If everybody worked for one year and gave every single penny to the government to put towards their national debt, they would still be in debt. With stagnant wages and fortune 500 companies paying little to no taxes, the government is not collecting the revenue needed to pay off this debt. These countries creating money and devaluing their currency has an additional effect of devaluing their debt. If 1 million dollars today can only buy what $500,000 bought yesterday, your debt has effectively been cut in half. Peoples wages must rise (sure they will...) to cover this inflation, thereby increasing tax revenue and decreasing the debt to GDP ratio. Only that isn't happening, the money is going into very few hands.
Gold trends closely with inflation, but the trend lines do not perfectly mimic each other. The below chart ties 1 decade of gold prices to the inflation rate. What I found is very surprising. Gold's trend line tends to precede inflation. In other words, gold goes up and the next year inflation rises. Gold drops in price and the next year inflation decreases.
Unfortunately, as the inflation adjusted price chart of gold per ounce shows (below), 2020 saw a substantial rise in gold prices mimicking the slope heading into the 2008/2009 financial crisis. Inflation is likely to dramatically increase this year and this will result in money getting pulled from investments.
What does this mean for Bitcoin? Bitcoin is often referred to as "cryptocurrency gold" partially because it is the standard that all cryptocurrencies are measured on, but also because it behaves like a commodity and its value increases with the devaluation of fiat currency. When inflation hits and money is withdrawn from markets, people have historically looked to gold as a hedge against inflation. As stated in the opening paragraph of this article, many people treat cryptocurrencies as investments and some money will be pulled from the market. However, people are increasingly considering crypto to be an asset unable to be deflated or a 21st century commodity to hold as a hedge against future financial crashes resulting from government incompetence and corporate disregard for all else on this planet aside from profits. Once inflation kicks into full swing, the two most traded cryptocurrencies, Bitcoin and Etherium will increase in value compared to fiat currencies. While these two will lead the way, altcoins will soon follow.
The main difference between cryptocurrencies and gold is what will cause cryptocurrencies to far outpace gold in gains. Gold has a worldwide adoption rate while only 15% of people in the world own cryptocurrencies. As profitability has become apparent, more people have been investing in cryptocurrencies. When inflation hits hard the constant gains and accessibility of cryptocurrency over gold will result in a major increase in cryptocurrency adoption. This means more money coming into crypto and causing a chain reaction of investment. 2021 and 2022 are going to be big years for cryptocurrencies thanks to calamitous circumstances we, the human race, have found ourselves in.