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Highlights
- On Wednesday, the US Labour Department released its latest figures revealing the highest percentage change in consumer price index (CPI) in more than 30 years
- Investors are worried that the Reserve’s underestimation of inflation rises could be a costly error
- Bitcoin’s price has yo-yoed significantly, losing US$5,000 here, gaining US$10,000 there. To say Bitcoin is a volatile asset doesn’t do it justice, really. It’s deeply manic Inflation. The dreaded curse that fiat is doomed to carry along with it as long as it lives.
On Wednesday, the US Labour Department released its latest figures revealing the highest percentage change in Consumer Price Index (CPI) in more than 30 years.
The announcement was a shock to many – not because it rose (that was expected) but because of how much it rose, particularly between September and October.
Meanwhile, while analysts were trying to wrap their heads around the latest CPI figures, Bitcoin – the world’s largest cryptocurrency – reached a record high evaluation.
Some may dismiss this as a mere coincidence. But it’s hard to dismiss the notion that Bitcoin is becoming the go-to asset to hedge against the dreaded curse of inflation.
With the economy just beginning to feel the effects of the pandemic, investors are asking whether Bitcoin can save them from the woes of rising inflation.
Breaking Down The Price Hikes
The recent figures from the US Labor Department revealed inflation had risen 6.2% in the past 12 months to October.
Economists had forecasted a rise but clearly hadn’t taken in to account the unexpectedly steep rise between September and October, where CPI rose by 0.9% - significantly above the 0.6% predicted by analysts.
The energy sector contributed to the 30-year high CPI increase massively, with oil prices climbing a massive 12.3% and motorists paying 6.1% more at the petrol pump.
Food prices were also hit hard, rising 5.3% from a year ago, with significant hikes in meat, poultry and fish.
Used vehicles also climbed an astonishing 26.4%, with an increase of 2.5% in October alone.
Federal Reserve Chairman, Jerome Powell, has attributed the large spike in CPI over the last year to the Covid-19 pandemic as the market continues to struggle with disruptions to the supply chain as well as labour shortages.
Powell has reassured investors that despite the growth in CPI, interest rates will remain stable.
Despite Powell’s reassurance, investors are worried that the Reserve’s underestimation of inflation rises could be a costly error.
Is Bitcoin The Saviour Investors Are Searching For?
Given the dramatic increase in inflation in the past 12 months, its perhaps not surprising that this has coincided with a boom in decentralised digital assets.
This very characteristic of decentralisation has attracted so many investors to cryptocurrencies like Bitcoin, which, by its very definition, don’t require any interference from a third party, like a central reserve or any other governmental organisation. Instead, Bitcoin operates as a peer-to-peer system where transactions remain secure and private.
Furthermore, Bitcoin has a maximum supply set at 21 million coins, which allows for built-in scarcity and is therefore seen as a store of value by investors.
In 2021, analysts at JP Morgan showed how the valuation of Bitcoin had changed in comparison to that of gold – traditionally a respected store of value.
Their data showed that a greater number of people are turning to Bitcoin as a hedge against inflation instead of gold.
CNBC also reported on November 10 that although gold spiked just a week before Bitcoin hit its most recent all time high of approximately US$68,500, this spike was still no match for Bitcoin, which out-valued Gold, not only that same week but also for many months prior to that as well.
Image Sources © Arenacreative | Megapixl.com
Bitcoin’s Issues
There’s no doubt Bitcoin has had a stellar year in terms of value. Since January 1, the price has more than doubled with its current price of just below US$65,000 dwarfing its January 1 price of around US$29,000.
The problem has been the volatility of its price between January and now. Its more than 100% increase hasn’t been a steady climb by any stretch of the imagination. Rather, it was a steady climb to around US$65,000 in May (almost the same as the price is now) before a heavy crash that brought the price back below US$30,000 (a loss of more than half its value).
Then in August, the price saw a resurrection of sorts to where it stands at this moment. Even within those two larger climbs, the price has yo-yoed significantly, losing US$5,000 here, gaining US$10,000 there. To say Bitcoin is a volatile asset doesn’t do it justice really. It’s deeply manic.
This creates a problem when Bitcoin is being offered as a safe alternative to an asset like gold, whose value doesn’t go through nearly as much turbulence. It would definitely be a game-changer if there could be a way to correct Bitcoin’s propensity for wild price swings.
What’s The Verdict?
There’s seems little doubt that the future of the US dollar won’t be without a steady rise in inflation. The pandemic’s disruption of labour and supply chains, not to mention the rollout of stimulus packages during the height of lockdowns, has all but assured that.
As the Federal Reserve tries its best to walk the line between raising interest rates and rising inflation, investors will continue to search for a way to minimise the financially draining effects of inflation. If this trend occurs, as it clearly has been for the past year, there’s no reason why Bitcoin won’t continue to reach new heights.
