It shouldn’t be controversial to say that bitcoin (BTC) benefited from the huge money prints the U.S. and other governments made during the coronavirus pandemic. The U.S. monetary supply ballooned in the first two years of the third decade of the 21st century – and some of that capital surely spilled into digital assets.
At the time the CARES Acts were passed (which pushed over $3 trillion into the economy), there was a popular but mostly untested hypothesis that bitcoin would act as a hedge against inflation. Because bitcoin is limited to just 21 million coins, some argued it would function like gold and could be used to hedge against rising prices.
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Inflation happens when there’s more money chasing the same amount of goods, causing prices to rise. As it happened, crypto – along with most other speculative asset classes – saw a dramatic rally as the money printers “went brrr.” Now, as the U.S. Federal Reserve hikes rates to curb the highest inflation in decades, BTC is on pace to record its worst quarter ever.
To be fair, it seems like everyone is learning on the spot. “We now understand better how little we understand about inflation,” Fed Chair Jerome Powell said Wednesday. As prices began to rise last year, the Fed’s position was that inflation would be “transitory,” the result of an economy jolting back after pandemic closures.
There’s still little consensus – officially and among us civilians – about what caused inflation. In truth, there’s likely a multitude of factors that contributed to this unique economic moment. Barry L. Ritholtz, co-founder, chairman and chief investment officer of Ritholtz Wealth Management LLC., recently published a list of 15 inflation drivers.
This list spans from the U.S. CARES Acts to the more recent war in Ukraine, as well as other factors including just-in-time delivery and semiconductor factory slowdowns that economists have noted created supply shortages across the global economy. At the bottom of Ritholtz’s list is, interestingly, crypto.
Bitcoiners may not have the hedge they wanted, but they do have a solid economic theory that printing money will devalue a currency. Further, in terms of asset inflation, the Fed has been pursuing “quantitative easing” – where it would enter markets with the aim of forcing financial institutions to make more loans and drive riskier economic activity.
In other words, the U.S. government’s fiscal stimulus and the Fed’s monetary policy created buyers who took on increasingly risky bets. This is at least part of an explanation for why speculative industries, including the nascent digital asset sector, become so valuable. Built on viable tech but still finding durable use cases, crypto grew into a $3 trillion behemoth at its height mostly based on speculation.
Ritholtz places a fair amount of burden on consumers for rocketing inflation, arguing that the Fed’s zero percent interest rates (ZIRP) – a policy essentially in effect since 2008’s Great Financial Crisis – ”did nothing for inflation for a decade-plus.”
“Consumers who continue to buy homes and cars despite substantial price increases are not suffering from inflation, they are (in part) a driver of inflation,” he wrote. “Pre-pandemic, consumers spent 38.7% on goods, but a whopping 61.3% on services. In 2020, the demand for goods rose 20% globally, but production increases were barely 5%. Prices rose accordingly.”
At a small scale, this might have happened in crypto, too. There’s evidence to suggest that people put their $1,200 stimulus relief checks directly into exchanges like Coinbase (COIN) and Kraken (just as average Americans reportedly used these relief payments to buy all sorts of goods and services – from AMC stock to new bikes).
But Ritholtz doesn’t seem to be blaming the small guy for crypto’s insane overvaluation and any inflationary effects that may have caused. He pointed to anecdotes like Lamborghinis being sold out for two years and sales of $100 million mansions “as hedge funds and VCs cashed in” their crypto holdings.
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Indeed, crypto functions in a way pretty similar to fiat currencies in that they can become valuable based primarily on collective belief. The difference is that crypto gives everyone a money printer, by enabling anyone to make a token and convince buyers it could have utility. To the extent that this activity drove inflation is an open question. There were plenty of reports of crypto founders buying yachts and New York City properties, having made a real fortune on virtual goods.
Many first-time bitcoin buyers were likely convinced by arguments that as the Fed debased the U.S. dollar the world would need an alternative reserve currency. There was a period of time where bitcoin’s price rose alongside inflation, causing something of a “positive feedback loop.”
The idea of digital gold, or bitcoin being resistant to inflation rather than being swept up in it, was – as crypto often says – a “narrative.” That doesn't mean bitcoin could not appreciate in price later, especially if more people again see the value in owning a programmatically scarce digital asset. But, at this moment, the story might be that bitcoin caused inflation.