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Bitcoin’s fans frequently praise the flagship cryptocurrency as a great hedge against inflation, the best haven for keeping your purchasing power intact during periods of fast-rising prices. In late February, Elon Musk, who in January famously invested $1.5 billion of Tesla’s cash horde in Bitcoin, tweeted that “only a fool” wouldn’t look for alternatives to parking dollars in the safe government bonds whose yields don’t even match the projected rise in the CPI. Bitcoin, he posited, at least offers better protection. “Bitcoin is almost as bs as fiat currency,” tweeted Musk. “The key is ‘almost.'”
Musk’s apparently suggesting that although Bitcoin prices bounce around, they’re more likely to keep you whole than, say, a 10-year Treasury that at 1.35% is yielding about.8% less than expected inflation. His stance echoes the Bitcoin zealots’ view that because only a fixed quantity of coins can ever be released, its value can never be diluted. That supposedly gives Bitcoin the edge over the dollar or Euro, currencies whose buying power can shrink when central banks swamp the markets with liquidity in their quest to hold down rates.
If that’s true, how come inflation expectations just hit a new peak, and Bitcoin is tanking? On February 21, Bitcoin reached an all-time high of $58,000. At that juncture, it appeared that investors might be turning to Bitcoin for safety, fearing that prices will rise a lot faster over the next decade than they anticipated a month or two ago. Since January 1, the 10-Year Breakeven Inflation Rate or BEI, jumped from 1.96% to 2.2%. But just when the BEI attained that two-year peak, Bitcoin went its own way, dropping 20% to $46,540 by mid-afternoon on February 23.
“Expected inflation was going up, and Bitcoin was going up as well,” says Chris Brightman of Research Affliliates. “That gave rise to the explanation that Bitcoin was increasing because it tracks the outlook for inflation.” For Brightman, the sharp drop as the BEI held at its new summit is more proof that Bitcoin’s fortunes are totally unrelated to where investors think prices are headed. “Bitcoin dropped by 20%, but inflation expectations didn’t drop by 20%,” he adds. “They didn’t drop at all.”
Bitcoin’s sudden swoon marks a return to form. Over time, its rallies and retreats have never borne any remotely consistent relationship with forecasts for inflation. From March 3 of 2017 to December 10 of 2017, the BEI eased 2.04% to 1.94%, while Bitcoin exploded 13-fold from $1,280 to $16,682. The markets foresaw a trend towards slightly faster price increases in the coming decade between mid-December of 2017 and mid-June of 2018 as the BEI waxed a bit from 1.94% to 2.10%. But at a time that justified a minor uptick in a reliable inflation hedge, Bitcoin swung the wrong way with a vengeance, dropping over 60% to 6300.
Between January 8 and July 5 of 2019, the outlook for inflation over the next decade narrowed slightly from 1.83% to 1.69%. In other words, fear of any surge in the CPI was nil. In those five months, Bitcoin tripled from $3,992 to $12,335. “Bitcoin prices have soared and collapsed multiple times in recent years while inflation, and forecasts for inflation, have remained stable,” says Brightman.
The big pullback is another reminder that Bitcoin marches to its own drummer, the fickle fancies of speculators. For a short time, Bitcoin and inflation followed the same beat. That meeting was pure chance–– just like betting on Bitcoin.