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Inflationary winds from around the world spell a sea change for Bitcoin

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Is the global economy in uncharted territory now vis-a-vis Bitcoin (BTC) and inflation? During most of the cryptocurrency’s brief life, the economic environment has been generally pro-growth with stable prices but recently, there are fresh warnings of an inflationary storm. 

If so, what does it mean for Bitcoin, long promoted by partisans as an inflation hedge though not really tested in this way since its 2009 founding? That is, will millions of individuals and institutions flock to BTC as a safe haven — an alternative to gold or the United States dollar?

Recent reports, like the 6.2% October rise in the consumer price index (CPI) of the United States — a 30-year record — were sobering, though this recent bulge in a single national economy might be more related to ongoing supply-chain snarls and pent-up post-pandemic consumer demand than any secular change in global markets.

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“Yes, it [i.e., inflation] is potentially a problem,” Mauro Guillén, dean at the University of Cambridge’s Judge Business School, told Cointelegraph. But, much of inflation’s danger is tied to consumers’ expectations of the future. If they believe that continued rising prices are an enduring fact of life, then they will purchase items sooner rather than later, anticipating higher prices.

“The fact that U.S. consumers are postponing buying big-ticket items due to inflation suggests that they believe inflation will come down,” said Guillén, adding: “I am guardedly optimistic that this is temporary.”

Others aren’t so upbeat. “It is clear now that inflation is less transitory than was initially hoped,” Itay Goldstein, a professor of finance at the Wharton School, told Cointelegraph. The world is struggling with supply-demand imbalances following the pandemic, and COVID-19-related monetary and fiscal stimulus also factor into recent inflation reports, but “it seems that inflation has taken a deeper hold and will take longer to subside,” according to him.

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A global phenomenon?

“Inflation has accelerated, and not just in the U.S.,” Marc Chandler, managing director at Bannockburn Global Forex, told Cointelegraph. Last week “we also learned that China’s CPI jumped from 0.7% year-over-year to 1.5%.” Will it last? It’s not clear at this point. “What we do know is that price pressures have not peaked and may not peak until well into next year.”

But, if global inflation were to worsen dramatically? Then “I would expect [crypto] adoption by both buyers and sellers to really explode,” Leonard Kostovetsky, assistant professor at Boston College’s Carroll School of Management, told Cointelegraph while adding that this isn’t the likeliest outcome:

“I don’t see this happening any time in the foreseeable future. My guess is that inflation will get under control fairly soon — next four years, perhaps — as pressure grows on policymakers to rein it in.”

Bitcoin received a price boost recently from the debut of the first-ever U.S. Bitcoin futures ETF, but it “seems to now be fueled by the sustained inflation that we are witnessing across all the world’s major economies,” Sui Chung, CEO of CF Benchmarks, a cryptocurrency benchmarks administrator, told Bloomberg.

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Bitcoin, of course, has a fixed supply cap of 21 million BTC. The USD, by comparison, is elastic and the growth in the United States M1 Money Stock has ballooned more than five-fold over the past five years: From $1.378 trillion in September 2016 to $7.245 trillion in September 2021 (426%), according to Federal Reserve Bank of St. Louis data.

“It is true that part of the attraction of cryptocurrencies like Bitcoin originates from the fear of inflation in fiat currencies,” said Goldstein. “I suspect that inflationary pressure will thus help Bitcoin and other cryptocurrency’s prices.”

But, BTC’s fixed cap may not make such a difference, others contend. “The price of Bitcoin is driven by demand,” said Guillén. If people believe that it’s a good store of value, then they will purchase BTC — which seems to be the case now, he allowed. “But, I wonder what will happen when interest rates go up and people realize that a Treasury bill will pay a nice interest, and it is so safe.”

“I think that old saw about limited supply needs to be unpacked,” said Chandler. “One can talk about the money link now after the 40% rally in October, but what happened to the money rule in Q2 when BTC fell from $58,900 to $34,500.”

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Bitcoin’s limited supply may not even give it an edge over other cryptocurrencies. Kostovetsky doubted that Bitcoin’s capped circulation gave it any big advantage over Ether (ETH) as a safe haven, for instance. “The key advantage of crypto as an inflation hedge would be that there are supply rules that can not be manipulated by humans.” Savers wouldn’t have to worry about some “artificial [i.e., politically motivated] increase in supply that would make their savings worth less,” he said.

Greater impact in the developing world?

Much of the recent inflation discussion focused on the U.S., but China, too, appears to be feeling some effects. That nation’s producer price index soared 13.5% in October (year-on-year), after a 10.7% increase in September. This raises other questions: Will global inflation hit the developing world harder than the developed world, and if so will poorer countries be more likely to adopt Bitcoin as an inflation hedge?

“I do see lower-income people and countries suffering from the impact of inflation,” said Chandler, especially those with weak banking systems and numbers of unbanked households. Before they can take advantage of Bitcoin or other cryptocurrencies, however, they arguably need to possess, at a minimum, cell phones and a certain level of financial literacy.

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“Bitcoin is proving to be a viable alternative to other more classic inflation hedges like gold,” Dan Gunsberg, CEO at HXRO Network, told Cointelegraph, adding that “poorer countries will continue to adopt Bitcoin as a hedge against inflation.” That said, while investors may flock to Bitcoin as a safe haven, it is still widely viewed as a risk asset and tends to correlate with other speculative assets like equities, he added. Guillén was less alarmed on the inflation front:

“So far, emerging markets and developing countries are not experiencing inflation rates higher than the United States. The dollar will remain strong. I don’t think we will see high global inflation.”

Entering unmapped waters?

All in all, “We are in uncharted territory,” said Kostovetsky. No one really knows if inflation will be severe and widespread or mild and localized, while Gunsberg added that “We have been in uncharted territory for inflation for longer than what’s been publicly communicated, which has been reflected in the price of Bitcoin,” as well as other financial assets over the past 12-18 months.

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Still, if inflation does turn sharply higher, while cryptocurrencies manage to become less volatile — two big ifs, admittedly — then “there is potential for people to hold their savings in crypto,” Kostovetsky told Cointelegraph, which would mark a big sea change indeed.

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Expert calls El Salvador’s Bitcoin volcano bonds, ‘Michael Saylor playbook for a country’

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El Salvador’s “Bitcoin City” and the proposed $1 billion Bitcoin volcano bond have ignited a range of reactions across the world. These are ambitious plans, no doubt, but they come as the crypto market is seeing a downturn and major economies are fighting inflation.

During an episode of the What Bitcoin Did podcast, host Peter McCormack spoke to macroeconomist Lyn Alden about El Salvador’s Bitcoin volcano bonds and whether they make sense.

Fire up the oven

To be issued in 2022, the first volcano bond will have a BTC booster coupon rate of 6.5% and a decade-long duration. Interestingly, $500 million will reportedly be used for Bitcoin mining, while the other $500 million is ideally for buying BTC, which will be stored for five years. If it goes up in value, investors stand to make gains.

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Alden called the volcano bonds the “Michael Saylor playbook for a country,” and said,

“It’s a very similar play to what a lot of entities do with real estate, where you never sell the real estate, you just keep refinancing it over time as it goes up in value. And, Bitcoin is basically a more volatile version of that. Obviously, it’s got less track record – 13 years. But the potential gains, if you’re right, are massive.”

However, Alden stressed the need for experts in the Bitcoin mining process. She said,

“Now, my understanding is that obviously, geothermal is very attractive energy to use. The climate [in El Salvador] is not super ideal for Bitcoin miners. And, so overall, you generally would want to have experts there who make sure that it makes financial sense at the end of the day…”

But what if…

McCormack asked if generating $65 million per year was enough to pay investors. For her part, Alden was cautious and reminded viewers to consider credit risks, interest payments, and the market’s reaction. However, she noted,

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“And this is kind of the game theory of, say, different countries, where El Salvador has less to lose in some sense. They, you know, they basically..have already had economic issues.”

McCormack and Alden agreed that the success of the volcano bond hinged on Bitcoin rallying for the next five years.

Bitcoin below $60,000

El Salvador’s President Nayib Bukele might be bullish, but the market has been seeing bearish momentum, as Bitcoin fell to $54,729.53 at press time. What’s more, the market was hovering around the fear or neutral territory for several days.

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El Salvador Buys the Bitcoin Dip Amid “Black Friday Sale”

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El Salvador took advantage of the sell-off, adding more coins to the country’s treasury

El Salvador’s President Nayib Bukele has taken to Twitter to announce that the country has added 100 Bitcoin ($5.4 million) to its treasury.

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The Bitcoin price plunged by more than 9% earlier today amid the global market sell-off.  

The fact that the plunge took on Black Friday, the day retailers slash prices to attract deal-hunters and cause shopping bonanza, prompted many corny and tired jokes about Bitcoin being actually on sale. Hence, many holders are being encouraged to buy the dip. 

In late October, El Salvador bought 420 Bitcoin that was worth roughly $26 million at the time when the purchase was announced by Bukele on Twitter.

Earlier this month, the tropical country also announced its plan to build the first Bitcoin city in the world, which will be situated at the base of a volcano. It has partnered with blockchain company Blockstream in order to raise $1 billion via a “Bitcoin Bond” and fund the highly ambitious project.           

In early September, El Salvador made history by becoming the first country to adopt Bitcoin as its official currency.        

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Is Bitcoin Entering a Bear Market? Top Analyst Updates Outlook After Sharp Crypto Pullback

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Popular crypto strategist and trader Michaël van de Poppe is looking at where Bitcoin (BTC) might be headed as markets worldwide nosedive amid the discovery of a new coronavirus variant.

In a new strategy session, Van de Poppe tells his 148,000 YouTube subscribers that it’s a combination of concern about more lockdowns as well as a cyclical correction that has investors seeing red.

“Not only the crypto markets are showing weakness at this point, as also the European stock markets opened significantly red today… and also the US stock markets are going to open in the red. But there are certain fears about the coronavirus lockdowns coming again. But there are also discussions about tapering happening at this point, and actually, the markets were due for a correction too. We have been grinding up heavily while the actual impact of a potential lockdown was not visible yet.

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Right now we do see one, and we still have a very natural and healthy corrective move which we haven’t been seeing in the past few months. In September we’ve had one, but since then no real correction has been taking place.

So finally we’re getting it, and when the dollar is showing strength it would make sense that the equities are going to have some pain too. Bitcoin has been seeing this correction already. Equities are following suit in the past week now too.”

The analyst goes on to assess Bitcoin’s latest price dip, going so far as to conclude that while he doesn’t think BTC is entering a bull market, he’s doubtful about relying on traditional four-year models for predicting future price action.

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“I really believe the reason why Bitcoin is dropping right now is because of the macroeconomics taking place. But regardless of that, I’m still very sure that the markets are not going to have a bear market at this stage. I think we are still eager for continuation in a bullish manner, but I do realize that the lengthening cycle’s most likely going to take place. A healthy correction is also happening at this point, in which the question becomes, where is Bitcoin going to bottom out? And how are altcoins going to perform out of that?

We can throw away the four-year cycles, we can throw away PlanB’s stock-to-flow model with these predictions because it’s not valid anymore. We are in a different environment when it comes to the markets right now. Clearly, we are currently having a harsh corrective move… but it shows that the markets are not predictable and expecting Bitcoin to run in four-year cycles is just not the case.”

Moving on to specific BTC price analysis, Van de Poppe is eyeing $55,000 as an important support level, but also thinks the leading crypto asset could fall as low as $48,000 – without signifying an end to the bull run.

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Source: Michaël van de Poppe/YouTube

“When we’re looking at Bitcoin against [the US dollar], at this point we still have a very important support level [approximately $55,000] that we are acting on right now. The crucial thing when it comes to the daily time frame is that we are flipping this level with $66,000 as resistance and started to crack south.

Meaning that currently, we are into higher time-frame support, but definitely depending on how this daily’s going to close, this is going to be weak going into the weekend, and especially going into next week, it will probably cause some more pain across markets.

In that case, when we’re looking at levels that we should be watching, [$55,000 to $55,600] is the first real level that you should be looking out for. However, the crucial level to me is still this level around $48,000. Even if we get in that region, I still believe that we’re bullish in markets and we’re just having a very natural corrective move before we’re going to accelerate again in 2022.”

At time of writing, Bitcoin is down nearly 8% on the day and trading at $55,186.

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