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Bitcoin Is Falling While Inflation Is Rising

Most investors agree that speculation is behind bitcoin’s price momentum rather than long-term investment

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Bitcoin is falling while inflation is rising, proving that, so far, the cryptocurrency is not a suitable asset to shield against inflation. During 2020 the world watched in amazement as bitcoin went from being worth just over $9,500 in January 2020 to nearly $60,000 by December.

Bitcoin was the most appreciated asset in 2020, a year marked by the pandemic, and the uncertainty caused by repeated quarantines. In total, bitcoin rose by just over 540 % last year. However, bitcoin appears to be on an accelerated decline in 2021. On Wednesday, the crypto was trading around $31,854.

Bitcoin fans have touted the cryptocurrency as a haven from inflation and a reserve asset that serves as a hedge against currency debasement, however, with rising inflation announcements from shortages of supplies such as microchips, lumber, steel and fuel, millions of crypto traders have come out to sell their bitcoins not to buy more.

bitcoin cae - inflación - El American
Growing demand in the United States, coupled with shortages of certain goods such as microchips or fuel, inflation has skyrocketed in the United States. (EFE)

While it is true that the announcement of rising inflation in the United States, which adjusts 5.4 % a year running, has generated volatility in the markets and even assets such as gold and silver have suffered a slight fall during the last month, the fall of bitcoin exceeds that of any other asset in the market. Just as bitcoin surprised many in 2020 by its astronomical rise, in 2021 it is doing so by its precipitous fall.

The steady fall of bitcoin also comes at a time when months ago institutional players in the market. Pension funds such as Ruffer, and companies such as coworking giant WeWork, have announced millionaire investments in bitcoin, while cryptocurrency trading platforms such as Binance are accepted as publicly-traded companies on the U.S. Stock Exchange.

Why is bitcoin falling when it should be an asset designed to preserve the value of money?

Bitcoin has been criticized for its high volatility and for the fact that its price behavior obeys more to the comments of celebrities such as Elon Musk, than to the real situation of the economy.

Most investors agree that speculation is behind bitcoin’s price momentum rather than long-term investment. Speculation can be observed by its derivative trading volume, in which traders never have actual possession of the asset (bitcoin) but resell it on speculation that the price will be higher.

The trading volume in the cryptocurrency derivatives markets on any given day is between 5 to 20 times larger than the derivatives trading volume in the stock market, a study by Carnegie Mellon University’s Cylab research group showed.

Other assets such as gold and silver have been more volatile in light of the inflation announcement in the United States. (EFE)

In a normal market, the future price of a good or commodity depends on its real demand, so the price of an asset such as oil does not really depend on its future prices traded in the derivatives market, but on its present demand and supply.

In the cryptocurrency market, the price of bitcoin seems to be determined exclusively by derivatives contracts. For example, in April when investment and pension funds liquidated their bitcoin positions and created panic in the market causing a massive bitcoin sell-off, on April 23 alone the market capitalization of bitcoin fell by more than $10 billion.

Is bitcoin an asset that serves as a store of value? Although there is still hope that the cryptocurrency will manage to integrate into the markets, bitcoin has so far shown itself to be a speculative asset that depends more on the approval of celebrity tweets than on macroeconomic fundamentals such as inflation.

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