- Inflation figures will deter the Fed from cutting rates this spring.
- Bitcoin should shrug that off, say analysts.
March inflation figures came in hot.
The consumer price index — typically used as a benchmark to measure inflation in the US — registered at 3.5% on Wednesday.
The number was higher than expected and means that inflation is accelerating, which will likely dissuade the Federal Reserve from cutting rates in June.
And while high rates are generally seen as bad for Bitcoin and other risky assets, some analysts say the top cryptocurrency will continue to rise as investors seek hedges against inflation.
“Either weaker inflation sees [interest] rates lowered, or higher inflation keeps the Fed on hold. Either way, lower real rates is positive for Bitcoin and gold,” David Brickell, head of international distribution at digital assets advisory platform FRNT Financial, told DL News.
When the Federal Reserve lowers rates, yields on US Treasury bonds decline, making them less attractive to investors. The cost of borrowing also decreases, making it easier for investors to access liquidity.
Riskier assets — like Bitcoin and tech stocks — tend to perform well in such circumstances.
Sean Stein Smith, an associate professor of accounting at Lehman College in New York, told DL News that higher-than-expected inflation “will lead to postponed rate cuts, and higher rates will continue to encourage investors to seek out high-performing assets like Bitcoin.”
Combined with decreases in the supply of Bitcoin after the halving event expected on April 19, that “will be moderately bullish for prices,” he said.
Macro woes
The international environment could also influence a flight to Bitcoin, Brickell said.
China must lower real interest rates to boost its economy, and Japan just raised the cost of borrowing for the first time in 17 years amid a currency crisis.
“The longer the US is forced to keep rates higher for longer, the greater the risk that something breaks,” Brickell said.
Western economies have suffered three liquidity crises since the Fed started hiking rates in 2022.
Another crisis could happen should the US central bank decide to keep liquidity conditions tight, Quinn Thompson, founder of crypto hedge fund Lekker Capital, told DL News last week.
But if Bitcoin is “the ultimate hedge” against the failure of the financial system, a financial crisis “could actually be rocket fuel for the next Bitcoin leg higher,” Brickell said.
Jo Wright, Eric Johansson, and Tom Carreras write about markets for DL News. Got a tip about Bitcoin and inflation? Reach out at joanna@dlnews.com, tcarreras@dlnews.com, or eric@dlnews.com
