Inflation is up and Bitcoin is down, but why?

Inflation is up and Bitcoin is down, but why?

Inflation is up and Bitcoin is down, but why?

Inflation is on everyone’s mind the world over. Billions of people are feeling the pain of rising prices, and yet BTC just keeps grinding lower. Why is one of the world’s best inflation hedges crashing while prices are going through the roof?


The real story behind rising inflation and falling BTC

Inflation is the highest that it’s been in decades. A few weeks ago there was a CPI print of 8.3%, about a 400% increase from anything we’ve seen in the twenty-first century. Those are the figures for America, but Europe and Asia aren’t doing much better.

According to a recent survey, inflation is the number one concern for Americans. This level of concern may be justified, since high inflation is affecting everyone in the country, with record high gas prices, food shortages, and price hikes across the board.

Given this multi-decade high inflation, it might seem strange that the crypto markets are crashing. With its limited supply and pre-set monetary policy, many investors have called Bitcoin the world’s greatest inflation hedge. If that’s actually the case, why isn’t BTC at an all-time high?

Although it’s difficult to find a perfect explanation for why markets do anything, it seems that like an imploding black hole of rising bond yields are dragging everything down with them. In the last few months we saw the fastest sell-off of the 10 year treasury note in history. Bond yields are skyrocketing as investors sell assets that are guaranteed to lose them money, and as yields rise it increases the cost of borrowing and slows down the economy.

The yield on the 10 year has been skyrocketing since fall of 2021 

Higher bond yields also tend to have a depressing effect on the markets because they make it more expensive to use leverage, which can force traders to reduce their position sizing. Higher yields also change the perceived value of owning stocks as measured by the DCF formula (Discounted Cash Flow analysis).

Many investors use DCF models to make their investment decisions, and when bond yields are low it makes stocks very attractive to own. As yields rise, stocks become less exciting by comparison and investors may reduce their equities exposure. Indeed, that’s exactly what we’re seeing right now.

Since the start of the year the NASDAQ has dropped 27% and the S&P 500 is down 15%. Lots of individual stocks, especially tech companies, are doing even worse. Netflix is down 71% from its recent highs in November and Snapchat dropped an astonishing 43% in one day.

Unfortunately, Bitcoin is highly correlated with the traditional markets right now. The more the S&P 500 sells off, the more BTC falls. At least for now, the negative effects of higher interest rates outweigh Bitcoin’s potential as a store of value. The US Dollar is also exceptionally strong at the moment, which is another factor that typically puts downwards pressure on BTC.

For Bitcoin to succeed it will need to break its correlation with the traditional markets. Here’s the venture capitalist and billionaire investor Tim Draper describing what he thinks needs to happen. “I’m still a bull on Bitcoin because it’s a great hedge against inflation, and as speculators leave it will diverge from tech stocks. I do believe that tech stocks will keep going down as long as interest rates keep going up.”

Hopefully this divergence happens sooner rather than later, as Bitcoin truly has a unique fundamental value that you just can’t find in any other asset.

This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

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