Bitcoin cheerleaders praise the No. one cryptocurrency as an inflation-proof asset since its coins are fixed and limited to 21 million, but bitcoin has failed to live up to the hype in recent months as the consumer price index (CPI) rises above the Federal Reserve target.
The consumer price index is a yardstick that shows the change each month in the price of consumer goods such as groceries, appliances, used cars, gasoline, and sundry other consumer and producer items.
Inflation in the U.S. spiked faster than expected in June, coming in hot at 5.4 percent over the same period last year and higher than the central bank’s target of 2 percent. The CPI stood at 4.2 percent and 5 percent in April and May respectively.
The Federal Reserve has refrained from hiking interest rates despite inflation ticking above the target it set for the economy, saying it will let price growth run hotter than usual in hopes of driving a stronger recovery and tighter labor market.
However, indicators show that prices will continue to spike even as Fed Chairman Jerome H. Powell downplays inflation risks.
The higher inflation rate has proved a major test for bitcoin’s alleged hedging virtues and has shown that the bull run and accompanying cryptocurrency rally — 240 times year on year — was mainly driven by speculative sentiments.
Bitcoin hit an all-time record of almost $65,000 in mid-April. But as inflation kept accelerating, the crypto suddenly reversed course, losing more than 50 percent of its value from the peak. Bitcoin was trading at $30,742.86 as of this writing.
“Interesting that as CPI inflation has climbed from +1.4% y/y in January to 5.4% in June, Bitcoin has essentially been cut in half,” Liz Ann Sonders, Chief Investment strategies at Charles Schwab & Co., tweeted.
Bitcoin, like any other asset such as gold and real estate that hedges against rising prices, is caught in an inflation trap but will eventually come out of it, Twitter user @SidhuMel predicted.
“Don’t really think there really is a real time inflation hedge.. #Gold #Bitcoin #RealEstate all have potential to be inflation traps once the inflation dragon goes away,” he wrote in a tweet.
Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?
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