Inflation in the United States of America is constantly reaching new record levels. The inflation rate is now rising by 5.4 percent. That is, the increase in prices for consumers of products has reached the strongest growth since 2008. This exceeded even the most pessimistic expectations of economists.
The experts had expected an inflation rate of only 4.9 percent, which would have meant a slight decrease from the 5 percent in May 2021. However, inflation actually rose again in June.
Trade attracts prices for goods and services
Market observers attribute the elimination of many corona restrictions due to falling infection numbers as the reason for the jump in the number of infections. Whether hotels, flight providers, fashion shops or car rental companies – all trading companies are now trying to use the increasing interest in their services to enforce higher prices and thus probably compensate for some of the loss of income during the pandemic.
However, according to many experts, inflation has mainly been fuelled by the ultra-loose monetary policy in the USA in recent years. The stock markets, which reached new record levels, had benefited from this during the pandemic. Not only in the USA, the Dow Jones, S&P 500 and other stock indices recorded records, but also in this country, the Dax has recorded enormous growth within a year and increased its value by more than 75 percent compared to the Corona low point.
Crypto Market Benefits from Inflation
But ultra-loose monetary policy has also taken advantage of the crypto market. Since traditional investments such as the bank account can hardly generate returns or even threaten negative interest rates, more and more investors have shifted their dollar assets into the purchase of Bitcoin, Ethereum and Co.
In the following years, Bitcoin and Co.have celebrated new all-time records. From lows below $ 4,000 in March 2020, the Bitcoin price has exploded to as high as $ 65,000 a year later. A growth of over 1,500 percent, which was even surpassed by many altcoins and eclipses the bull market.
Fed strategy shift increasingly likely
But will the rising inflation rate now possibly become a brake on the Bitcoin price? A change in strategy by the US Federal Reserve is becoming increasingly likely. Until now, she had always emphasized that the rising inflation rate was only a temporary event and that this was due to special effects, which are also related to the corona crisis.
However, it is now clear that the inflation rate could continue to increase in the coming months despite a sharp decline in infection if the current trend continues and trade continues to tighten the price cap for consumers.
Many experts therefore expect that the US Federal Reserve could soon say goodbye to ultra-loose monetary policy. Possibly later this year. This is what Thomas Gitzel, chief economist at VP Bank, believes. He told the Deutsche Presse Agentur (dpa): “The Fed will soon present a concrete roadmap for the exit from asset purchases.“
US dollar gains strength
Initial reactions of the financial markets to the possible price swing can already be seen. Thus, the US dollar, which suffered so much during the Corona crisis, has recorded an increase against the euro. The euro fell below $ 1.18. At the beginning of the year, however, the price was still at $ 1.23. This could be a sign that the dollar is regaining strength and investors may be putting more emphasis on the fiat currency again.
What is interesting, however, is that the stock markets have so far barely reacted to the news and so far no signs of a bubble are discernible. For months, prices have continued to move at a high level, although the high pace of the second half of 2020 and the first months of 2021 has significantly decreased.
However, things are different in the crypto market. Bitcoin, Ethereum and Co. are still in correction mode. Prices began their sharp decline exactly two months ago and have not recorded a sustained upward trend since then. For example, the Bitcoin price continues to move in the low 30,000 dollar range, which is around 50 percent below the quotations in April 2021.
Bitcoin coveted as inflation protection
What happens to the Bitcoin rate if the Federal Reserve actually corrects its course and declares war on inflation?
Perhaps this is a threat to the Bitcoin course. Because BTC was just touted as inflation protection during the pandemic. As infection numbers climbed worldwide, businesses were forced to close, and governments pumped up billions of dollars in aid packages, the crypto market experienced perhaps the best phase in its comparatively recent history. The huge growth in the crypto market fell precisely during this period.
The strong correlation between a rapidly increasing amount of dollars in circulation and the rising Bitcoin price is impressively shown in the chart below. Never before has the Federal Reserve spent as much dollars as in 2020. And here is meant a time window of almost 60 years. In 1959, the US Central Bank began to record monetary developments.
More dollars in circulation than ever before
Data from the Federal Reserve Bank of Saint Louis also shows that the volume of the liquid money supply M1 (banknotes, coins, balances on overnight accounts and traveler’s checks) has literally exploded in just one year between March 2020 and February 2021. From about $ 4.3 trillion, it has grown to $ 18.4 trillion, which is a quadrupling.
However, if this monetary policy is ended, it could weaken Bitcoin. For many investors, the Bitcoin as an investment is so interesting precisely because it can not be produced in an inflationary manner like the dollar. The maximum circulating amount of the Bitcoin is finally limited to 21 million BTC by the white paper of Sathoshi Nakamoto.
Proponents of Bitcoin consider the cryptocurrency primarily for this reason a lucrative future investment. Even if Bitcoin might not prevail as a global currency, BTC could still serve as inflation protection, according to the thesis. Thus, Bitcoin is considered a similar store of value to gold. As a consequence, increasing demand for Bitcoin can not lead to more circulating Bitcoin, but only to an increase in the price.
For Bitcoin, a move away from loose monetary policy would therefore in all likelihood not be a good signal. However, investors of BTC should not rush to sell their Bitcoin now.
First, the Federal Reserve has not yet announced a decision to change its strategy. As long as this is not decided, it is only speculation.
And secondly, no one can predict how inflation and the dollar amount will develop in the long term, even if the Fed temporarily changes the strategy. New crises in the future could also again lead to a new flood of dollars to support the economy. On the other hand, one thing seems certain: the Bitcoin will remain limited to 21 million BTC even in 100 years and will never be produced in an inflationary way.