On Friday last week, Bitcoin jumped by 8% to over $62,000 after the Securities and Exchange Commission approved the first-ever Bitcoin futures exchange traded fund. The green light is a milestone for the crypto industry, where companies have tried in vain for years to receive approval for a crypto-linked ETF .
But even with the big SEC news, it appears that a more fundamental market force is behind Bitcoin’s continued rise: Inflation. The utility of Bitcoin in an inflationary environment has been touted from the cryptocurrency’s origin; in fact, it is baked into Bitcoin’s design. With its hard cap of minted tokens (only 21 million Bitcoins will ever exist), Bitcoin was built to serve as a trustworthy store of inflation-proof value and provide an alternative to fiat currencies, whose supply is controlled by governments and central bankers and therefore are subject to wild inflationary periods.
For precisely this logic, many of Bitcoin’s critics pointed to the cryptocurrency’s dismal performance over the spring and summer of this year, as inflation rose and rose. From the beginning of April through July, the Consumer Price Index rose an aggregate 2.8%. The substantial growth in prices was driven in large part by a “supply shock” as the economy reopened and more people got vaccinated, but trillions of dollars in government stimulus also seems to have played a role. And yet, despite these seemingly ideal conditions for an inflation-proof asset, Bitcoin fell 32% over this time span.
But in the last two months, market sentiment around inflation has shifted in a profound way. Whereas the vast majority of commentators previously described inflation as “transitory,” many now believe inflationary conditions are a medium to long-term trend. “The real narrative” in markets should now be “over the type and duration of inflation, which has been building all year and isn’t transitory,” says Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance.
A big driver behind the shift in perspective? Energy prices. On Friday, the price of oil surged above $85, at a three-year high as the relaxation of Covid travel restrictions has led to a surge in global demand that is set to continue growing as vaccine distribution picks up globally. Meanwhile, the Energy Information Agency says that natural gas may cost as much as 30% more for heating this winter, to levels not seen since the winter of 2007-2008. Even coal is soaring.
Since soaring energy prices are felt by everyone who owns a (non-electric) car or has a home to heat, inflation is increasingly the number one financial issue discussed at kitchen tables and over corporate boardrooms across America; as the economy recovers from Covid lockdowns and consumer torpor, inflation is still hanging around as something of a pandemic hangover, with no signs of subsiding any time soon.
In other words, the SEC’s approval of a Bitcoin futures ETF is simply the cherry on top of an inflation-flavored sundae that Bitcoin investors are all too happy to keep eating.
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