Bitcoin drops after Powell spills cold water on inflation expectations

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Bitcoin drops after Powell spills cold water on inflation expectations


Significantly increased inflation is the strongest bullish case for Bitcoin, a cryptocurrency that bills itself as the most secure insurance against a potential rise in consumer prices and fiat devaluation caused by quantitative easing programs in the United States. central banks and billions of dollars in government stimulus packages. .

But on Tuesday, Bitcoin faced a headwind as it tried to continue its year-long bullish rally to the upside. The cryptocurrency slipped amid Jerome Powell’s testimony to Congress, in which the Federal Reserve Chairman stressed that the $ 1.9 trillion stimulus package would not lead to an unwanted spike in inflation.

“We could see upward pressure on prices. Our best guess is that the effect on inflation will not be particularly large or persistent, ”Powell told lawmakers.

Bitcoin is attempting a rebound from its intraday low. Source: BTCUSD on TradingView.com

Bitcoin…

… Traded for just under $ 56,000 prior to Mr. Powell’s testimony. But the cryptocurrency came under pressure after the governor’s comments on inflation, indicating short-term nervousness among traders who based their theories on higher inflation.

This is due to the fundamental characteristics of Bitcoin. The cryptocurrency comes with a limited supply cap of 21 million tokens, which is halved every four years due to an algorithm preprogrammed into its source code.

This makes Bitcoin rarer than gold, its main rival in the safe-haven market, and the US dollar, the global store of value, which has weakened by about 12% from its March 2020 high. in response to the Federal Reserve’s ultra-loose currency. US government policies and stimulus plans in billions of dollars.

BTC / USD jumped over 600% during the same period. Meanwhile, the pair’s rise also coincided with a 10-year inflation line spike – from 0.63% in March 2020 to 2.29% on March 23, 2021. The reading was above l The Fed’s inflation target of 2%, a point at which it would unwind its loose monetary policies by raising benchmark rates.

inflation threshold, bitcoin, federal reserve

The equilibrium inflation rate is a measure of expected inflation derived from 10-year constant-maturity Treasury securities and 10-year inflation-indexed constant-maturity securities. Source: FRED

Last week, Fed officials said at the end of their monthly policy meeting that they would tolerate near zero interest rates until 2024. That, combined with Mr. Powell’s pledge to control inflation, indicated a lower likelihood of dramatic spikes in consumer prices, which could strengthen the US dollar and reduce appetite for bitcoin among US investors.

Dissenting opinions

The creator of the Stock-to-Flow model, known by his pseudonym PlanB, referred to a quote from the European Central Bank. He said central banks have the option of expanding their asset purchase programs (i.e. more quantitative easing) because their inflation rates are already too low.

“This means more emergency purchasing programs in the event of a pandemic”, Noted Plan B. “It’s good for Bitcoin.”

The analyst expects the cryptocurrency to reach $ 100,000 to $ 288,000 in 2021. Other countries hit by inflation (read Turkey) could also increase the global demand for Bitcoin relative to its declining supply.



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