Inflation and BTC. Cause-and-Effect Relationships.

During the last two years the US government has printed a substantial amount of dollars to help the economy during the pandemic and the value of BTC soared. Now the FED is trying to tame growing inflation by raising interest rates and the value of BTC is falling. How is this connected?

When the US government and others started to print money around 2 years ago (google CARES Acts to learn more) and significantly increased the money supply, inflation was discussed openly. And BTC seemed to be a reliable asset or even a hedge against inflation — it is technically limited and, in a way, initially protected from inflation by its code. Quantitative easing encouraged people to take more risks and the crypto industry could have received a huge part of the monies’ poured into the economy.

“There’s a crazy amount of money being printed right now, so the value of money is going down. Assets with limited supply, like bitcoin, real estate or shares/stocks, those price tags are going up,” Oki Matsumoto, CEO of Monex Group told CoinDesk (Jan 2021).

It is difficult to say who and what is to blame, but then inflation in US began to climb around the same time as BTC started its dramatic fall. The inflation rate became way higher than expected and the FED had to switch from a lax monetary policy to a tight one. The BTC fall can be explained by the fact that money got more expensive due to higher interest rates and people were not ready to spend it on risky obscure assets like crypto. Perhaps in time we’ll see BTC recovering despite inflation, but it is difficult to say whether bitcoin is a long-term inflation hedge without a retrospective overview.

Concurrently some people consider BTC to be the stimulus that raised inflation. As crypto became the talk of the town, many people saw the possibility to print money by themselves ignoring FED policy etc. All they had to do was to persuade other people that their coins (or NFTs for example) had real value. Some lucky people did and made real fortunes in the virtual world and spent this fortune in the real world pushing up inflation. Barry L. Ritholtz, co-founder, chairman and chief investment officer of Ritholtz Wealth Management LLC recently has published a list of 15 inflation drivers. Crypto is one of them and here is what he says:

Why is crypto on this list? Because massive gains led to a series of big spends — from $100 million mansions as Hedge funds and VCs cashed in; but do not ignore the starter homes, where Redfin found “11.6% of people buying homes for the first time said that selling investments in cryptocurrency had helped them save for a down payment.” Lamborghinis have been sold out for 2 years, and (anecdotally) crypto profits are driving at least some of that. Some of the larger dealerships are accepting crypto as a form of payment.

Both cause-and-effect relationships sound persuasive. What do you think? Does the value of BTC push inflation up or does inflation stop BTC from growing? Is this the chicken or the egg first conundrum?