Bitcoin (BTC), and other inflation assets, became worthless when central banks decided inflation was a bad thing, says former Wall Street analyst and International Monetary Fund economist David Woo.
The largest cryptoasset by market capitalization bitcoin fell to an 18-month low last week after the US inflation print climbed to a 41-year-high and the US Federal Reserve (the Fed) also raised interest rates by 0.75%, the biggest single rise in 30 years.
But the bellwether cryptocurrency has been on a downward trajectory, along with altcoin prices, since last November, when Jerome Powell first announced the end of the Fed’s quantitative easing era.
Tough times for inflation assets
Speaking during a discussion with Capital.com’s economist David Jones, Woo said bitcoin was an example of an asset that performs well during economic policies aimed at stimulating the economy.
“Reflation, generally speaking, is very bullish for inflation assets, whether it's gold, inflation-indexed bonds or even bitcoin (BTC) for that matter.
“If you remember, bitcoin has been touted as the great inflation hedging asset. When central banks decide inflation is not a good thing anymore, that's when inflation assets become worthless.”
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And central banks have been taking action on inflation. The Bank of Korea was the first significant central bank to raise rates in November and has since been followed by a number of countries, most recently Australia.
Altcoin prices dive too
According to Woo it is at this point that inflation assets lose their shine.
“They [the assets] lose their shine when they're stocks, basically bonds or anything else for that matter, which is what's been going on right now”, said Woo.
Public opinion forces central banks to act
According to the former IMF economist, public opinion on inflation is forcing central banks to act, and this process is likely to continue.
“If you actually look at, for example, in the US, why Biden's approval rating is on the floor is because Americans say that inflation is killing them.
“All of a sudden, central banks around the world have no choice but to view inflation as a bad thing.”
Easy money behind BTC’s rise
Similarly, Capital.com’s macro strategist Piero Cingari alludes to the fact that the cryptocurrency market boomed over easy money, until the Fed took action in efforts to curb inflation.
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“The most trusted ally for bitcoin's spectacular climb before 2022 was the market’s abundance of liquidity, which was generated by the ultra-easy monetary policies of global central banks.
“It is not a coincidence that the end of the unprecedented monetary stimulus, with the Fed hiking record-low interest rates to combat a four-decade high inflation, corresponds exactly with the collapse of bitcoin and the cryptocurrency market.”
BTC down 55% in 2022
As of 22 June bitcoin has lost more than half of its value since the beginning of the year (-55%). In contrast US inflation is now pitching in at 8.6%.
ETH/US dollar chart
“Therefore, bitcoin cannot be considered to have safeguarded investors from the shock of inflation, and additional Fed hikes pose a threat to the cryptocurrency market,” he adds.
Cingari also buckets stocks within crypto in terms of their exposure to a tighter macro environment.
BTC is no inflation hedge
Cingari is clear in his view that investors who saw bitcoin as an inflation hedge were imbibing 'hopium'.
“Bitcoin cannot be considered to have safeguarded investors from the shock of inflation, and additional Fed hikes pose a threat to the cryptocurrency market.”