Bitcoin Market Intelligence - Issue #8





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Jan Wüstenfeld
Jan Wüstenfeld
Hey everyone,
In this issue, I am writing about price inflation, monetary inflation and whether bitcoin is a hedge against one or both.
With inflation sky high and bitcoin price on a downward trend, particularly bitcoin critics have started celebrating another “win” that bitcoin does not appear to hedge against inflation. One of the traits often attributed to bitcoin.
Yes, it may be true that it is not a good hedge against consumer price inflation as measured by the consumer price index (CPI). But is that the right metric to look at? Or should we look at monetary inflation in the Austrian Economics sense and how bitcoin fares against it?
No clear relationship between CPI and bitcoin price
bitcoin a hedge against (extreme) monetary inflation
or at least dependent on central bank liquidity
Is bitcoin a hedge against consumer price inflation?
Many have argued that bitcoin is supposed to perform well in times of high consumer price inflation due to its properties (scarcity in particular). But is that really the case?
Graph 1 shows the percentage of bitcoin’s price compared to a year ago and that of the Consumer Price Index for All Urban Consumers: All Items in the U.S. City Average since the beginning of 2017.
Just by the looks of it, there does not appear to be a clear correlation between consumer price inflation and bitcoin’s price. Particularly pre-COVID-19, it is hard to see a clear relationship.
Graph 1: Bitcoin Price and CPI US  (Percent Change from Year Ago): 2017-present (Source: FRED)
Graph 1: Bitcoin Price and CPI US (Percent Change from Year Ago): 2017-present (Source: FRED)
In Graph 2, I zoomed in on this cycle so that the scale is not as distorted by price changes in 2017.
Since 2020 some co-movements between both variables can be observed. While there are co-movements (green areas) or one of the variables at times seems to lead the other, they are also trending in opposing directions for a substantial time of this cycle (red areas).
Bitcoin’s price already started to rise before inflation started to rise.
Some argue that in this case, bitcoin’s price has been front-running high inflation numbers. However, I don’t really buy this argument.
While many bitcoiners may have been predicting high inflation numbers due to increasing monetary intervention (for the right or wrong reasons), I do not think most market participants have bought bitcoin to hedge against upcoming inflation numbers.
I believe that price has been primarily driven by a central bank-induced liquidity rally which better matches the data as I will explain below.
Graph 2: Bitcoin Price and CPI US  (Percent Change from Year Ago): 2019-present (Source: FRED)
Graph 2: Bitcoin Price and CPI US (Percent Change from Year Ago): 2019-present (Source: FRED)
Is bitcoin a hedge against monetary inflation?
In Graph 3 the bitcoin price in USD and the value of the money supply M3 of the USD are displayed (the picture is very similar if M2 is used, but M3 is broader, so I am going to use M3 here).
Not long after M3 started to explode upwards at the beginning of 2020 bitcoin’s price did also bottom out during the flash crash in March. Around mid-2021 when M3 started to slow bitcoin’s price started to decline as well.
Lately, we have even seen M3 starting to decline as the Fed is taking liquidity out of the system.
Graph 3: Bitcoin Price and M3 US in USD: 2017-present (Source: FRED)
Graph 3: Bitcoin Price and M3 US in USD: 2017-present (Source: FRED)
In Graph 3, the slow down in money supply growth and its relation to bitcoins price growth is not as visible. The percentage change from a year ago shows that much more clearly in Graph 4.
In February 2021, the year-over-year money supply growth of M3 started to peak. Shortly after that, bitcoin’s year-over-year price growth peaked in mid-March. The lagging reaction of bitcoin’s price may be as liquidity injections and withdrawals by the Fed potentially take time to materialise in the markets.
Interestingly, when the decline in M3 growth slows, you can see bitcoin’s price growth behave similarly.
M3 and bitcoin’s price movements even match over the last months, whereas the price of bitcoin does not match with CPI developments over the last months.
Following this, the data speaks for bitcoin being a hedge against monetary inflation over it being a hedge against consumer price inflation.
In the previous cycle, we do not see the relationship between bitcoin and M3 as clearly.
On the one hand, this may be since M3 did not increase to such an extreme, and on the other hand, the retail frenzy in 2017 could have been the dominating factor.
So bitcoin may be a hedge against extreme monetary inflation, as we have seen during this cycle, but not necessarily modest monetary inflation.
Graph 4: Bitcoin Price and M3 US (Percent Change from Year Ago): 2017-present (Source: FRED)
Graph 4: Bitcoin Price and M3 US (Percent Change from Year Ago): 2017-present (Source: FRED)
However, it is important to point out that with increasing monetary intervention and liquidity injections, not only bitcoin benefited but also financial assets.
For instance, if you look at the year-over-year change of the S&P 500, the index shows a very similar pattern to that of bitcoin (see: Graph 5). This is not surprising as they have been highly correlated during this cycle.
Due to this, some might argue that bitcoin is not a hedge against monetary inflation but that liquidity is simply lifting all boats.
Graph 5: S&P 500 and M3 US (Percent Change from Year Ago): 2017-present (Source: FRED)
Graph 5: S&P 500 and M3 US (Percent Change from Year Ago): 2017-present (Source: FRED)
Whether you call bitcoin a hedge against (extreme) monetary inflation or argue that it simply goes up with increasing central bank liquidity as many other assets do is up to you.
Currently, the Fed is hard on the brakes and with that is dampening bitcoin’s price.
But worry not. Three things are certain in life:
  1. Death
  2. Taxes
  3. And ever-increasing monetary intervention by central banks
It is just a matter of time before the interventionist spiral of central banks turns back on. Once the Fed pivots or hints at a pivot it is time for bitcoin to shine again.
Next up:
Tomorrow, Wednesday, July 13, 2022, at 8:30 A.M. Eastern time, the US CPI numbers for June will be released. On Monday, the White House has already communicated that they expect headline inflation to be highly elevated (for whatever reason). According to a poll by Reuters, Economists expect year-over-year inflation to come in at 8.6% for June.
I wouldn’t be surprised if numbers come in a bit higher. If the numbers come in hot, expect more volatility to the downside, which would give further reason for the Fed to continue tightening (less liquidity -> price pressure).
Also upcoming on Friday, July 12, 2022, at around 8:30 A.M. Eastern time is the US Advance Monthly Sales for Retail Trade and Food Services for June. This can give us some indication of how the US consumer and US economy are doing.
Stay safe out there! Don’t trust! Verify! Make up your own opinion and consider multiple sources. 
Jan Wüstenfeld
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This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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Jan Wüstenfeld
Jan Wüstenfeld @JanWues

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