Inflation is actually bad for bitcoin

Among all of the falsehoods of Bitcoin, the argument that Bitcoin is a hedge against inflation is one of the most laughable, because the price of Bitcoin benefits from low inflation. Wait what? Read on.

  • There are basically four economic quadrants: a combination of slowing/increasing inflation, and slowing/increasing economic growth.
  • Equities benefit from increasing growth and slowing inflation. That basically explains why the stock market has been outperforming bonds so massively for the last decade.
  • Why? well, if inflation goes up, central banks will raise interest rates. This is bad for equities since that means the cost of leverage goes up, consumers feel the pain (lower profits) and bonds give a higher yield, etc.
  • However, increasing inflation will raise yields, meaning lower bond prices, and higher inflation will eat the profits of fixed income. So you need something more to prefer to buy bonds instead: low growth.
  • Over the past decade, the correlation of the S&P500 to bitcoin is an impressive 0.54. I have a python script that lets me plot different assets into clusters depending on the correlation, and BTC ends up with SPY always, no matter the time window I put into script. I know that 0.54 does not sound like a lot, but if I put a random stock like TSLA, the correlation with the SPY is 0.55. I am not joking.
  • This basically means that there is no benefit in holding Bitcoin in a portfolio for diversification purposes.
  • Furthermore, it also means that, just like equities, Bitcoin will be similarly affected by changes in interest rates. With the jobs report and FOMC meeting in December, it is quite clear to investors that there will not be as many cuts as expected. Therefore, the -4% of S&P500 and -15% in Bitcoin.
  • Of course, there are other factors, like the not too positive answers from the FED about a Bitcoin reserve (literally said it is stupid).

TLDR: There is no correlation between inflation and bitcoin. If I did not make my point clear, you can read some academic literature, like this: https://www.sciencedirect.com/science/article/abs/pii/S0148619524000602#:\~:text=Notably%2C%20the%20inflation%20hedge%20property,integrated%20into%20mainstream%20financial%20markets.