Bitcoin Falls After Powell Pours Cold Water On Inflation Expectations



Drastically high inflation makes the strongest bullish case for Bitcoin, a cryptocurrency that presents itself as the surest insurance against a potential surge in consumer prices and fiat devaluation caused by the quantitative easing programs of central banks and the trillions. dollars in government stimulus packages. .

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

“We could see some upward pressure on prices. Our best opinion is that the effect on inflation will be neither particularly great nor persistent, ”Powell told lawmakers.

Bitcoin, cryptocurrency, BTCUSD, BTCUSDT

Bitcoin attempts a bounce move from its intraday low. Source: BTCUSD on TradingView.com

Bitcoin …

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

That is due to the main characteristics of Bitcoin. The cryptocurrency comes with a limited supply limit of 21 million tokens, which is halved every four years due to a pre-programmed algorithm in its source code.

That makes Bitcoin likely scarcer than gold, its main rival in the safe-haven market, and the US dollar, the world’s store of value, which weakened by about 12 percent from its March 2020 high in response to the ultra-lax monetary policy of the Federal Reserve. US government’s trillion-dollar policies and stimulus packages.

BTC / USD increased by more than 600 percent in the same period. Meanwhile, the pair’s rally also coincided with a pick-up in the 10-year equilibrium inflation rate, from 0.63 percent in March 2020 to 2.29 percent on March 23, 2021. The reading was down. above the Fed’s inflation target of 2 percent, a point at which it would unwind its loose monetary policies by raising benchmark rates.

equilibrium inflation, bitcoin, federal reserve

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

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

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 room to expand their asset purchase programs (aka more quantitative easing) because their inflation rates are already too low.

“It means more pandemic emergency purchasing programs,” indicated Plan B. “This is good for Bitcoin.”

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



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