Bitcoin continued to trade lower on Tuesday as traders struggled with contradictory views on inflation, which has become tougher for economists to forecast amid the uncertain coronavirus outlook.
The market waited for the Jackson Hole meeting of central bank governors at the end of this week for more clues. On Thursday, the Federal Reserve chairman, Jerome Powell, will deliver a keynote that, as some observers believe, will shed more light on the US central bank’s inflation targeting.
One camp believes that the Fed’s spared-no-expense policy to aid the economy through the coronavirus pandemic has put the US en route to higher consumer prices.
The other side, meanwhile, sees the demand for goods and services going down due to rising unemployment, leading to deflation.
Nevertheless, the real debate is between money creation and money velocity. The Fed may continue to inject trillions of dollars into the economy via its open-ended bond-buying program, as it has done since March 2020.
The strategy has so far made the US dollar weaker due to oversupply. Meanwhile, investors have hedged into scarcer assets like gold and bitcoin to protect their savings.
But it’s not the supply but the use of money that affects goods and services. That is the same reason why the inflation grew at a subdued rate since 2008, the year that saw the Fed started its easing program to aid the post-recession US economy.
“THE LINK BETWEEN MONEY SUPPLY AND INFLATION IS STILL VERY TENUOUS,” DEREK TANG, AN ECONOMIST AT LH MEYER/MONETARY POLICY ANALYTICS IN WASHINGTON, TOLD BLOOMBERG. “WE MAY HAVE A TON OF MONEY SUPPLY. BUT THAT’S NOT NECESSARILY GOING TO LEAD TO A TON OF INFLATION.”
Traders enter the new week with these conflicting opinions.
That is fairly visible in the choppy price actions across all the traditional and new markets. On one hand, Bitcoin and gold are slipping lower. And, on the other, equity markets are rallying higher as more and more investors look into stocks to park their devalued fiat currencies.
Bitcoin Remains Bullish To Many
It is vital to notice that both Bitcoin and gold are correcting lower after establishing their respective local tops.
Many analysts see the downside moves as profit-taking at the side of short-term traders. They expect the safe-haven assets to hold key technical support levels in the coming session, followed by a sharp pullback towards newer highs.
“Amidst unprecedented monetary and fiscal stimulus,” writes New York-based investment firm Grayscale in its August report, “investors are searching for ways to protect against an ever-expanding monetary supply.
“BECAUSE OF BITCOIN’S UNIQUE QUALITIES – SUCH AS ITS VERIFIABLE SCARCITY AND SUPPLY THAT CAN’T BE CONTROLLED BY A CENTRAL AUTHORITY – WE BELIEVE IT CAN BE LEVERAGED AS A STORE OF VALUE AND AS A WAY TO ESCAPE THIS GREAT MONETARY INFLATION.”
Bitcoin analyst Lark Davis also sees the cryptocurrency bouncing back towards higher valuations based on the current macro setup. In one of his latest tweets, the YouTuber called for a BTC/USD close above $13,800.
“ONCE WE SMOKE THAT IT IS ONLY A SHORT HOP UP TO $20,000 AND BEYOND! IT COULD EASILY HAPPEN BY THE END OF THE YEAR,” HE STATED.