Inflation does not have a major impact on Bitcoin’s price, as many believe. Instead, a weakening US dollar helps push up the cryptocurrency alongside gold, according to NYDIG.
“The community likes to pitch Bitcoin as an inflation hedge, but unfortunately, here, the data is just not strongly supportive of that argument,” NYDIG global head of research Greg Cipolaro said in a note on Friday. “The correlations with inflationary measures are neither consistent nor are they extremely high,” he added.
Cipolaro noted that expectations of inflation serve as a “better indicator” for Bitcoin (BTC), but even this measure is not closely correlated with the cryptocurrency’s price movements.
Bitcoin proponents have long lauded the asset as “digital gold” and a hedge against inflation due to its hard fixed supply and decentralized nature. However, Bitcoin has recently become more embedded in, and correlated with, the traditional finance system.
Interestingly, Cipolaro mentioned that real gold isn’t much better as an inflation hedge. It has shown an inverse correlation with inflation and has been inconsistent over various periods. He described this as “surprising for an inflation protection hedge.”
### Weakening Dollar a Boon to Bitcoin and Gold
Cipolaro explained that gold typically rises when the US dollar weakens, as measured by the US Dollar Index against other currencies. “Bitcoin also has an inverse correlation to the US dollar,” he said. “While the relationship is a bit less consistent and newer than gold’s, the trend is there.”
NYDIG expects Bitcoin’s inverse correlation with the dollar to strengthen as the cryptocurrency becomes “more embedded in the traditional financial market ecosystem.”
### Interest Rates and Money Supply: The Real Movers for Bitcoin
According to Cipolaro, interest rates and the money supply are the two major macroeconomic factors impacting the price movements of both Bitcoin and gold.
Gold has traditionally risen when interest rates fall, and fallen when interest rates rise. Cipolaro noted that this relationship “has emerged and strengthened over time” for Bitcoin as well.
Additionally, the relationship between global monetary policy and Bitcoin has been “persistently positive” and strong over the years. Looser monetary policies have typically benefited Bitcoin’s price.
These similar price patterns in response to macroeconomic conditions demonstrate Bitcoin’s “growing integration into the global monetary and financial landscape,” Cipolaro said.
### Macro Perspective: Gold as a Real-Rate Hedge, Bitcoin as a Liquidity Barometer
“If we were to summarize how to think about each asset from a macro factor perspective, it is that gold serves as a real-rate hedge, whereas Bitcoin has evolved into a liquidity barometer,” Cipolaro concluded.
As Bitcoin continues to mature within the financial ecosystem, understanding its unique relationships with inflation, the dollar, and monetary policy will be crucial for investors navigating the evolving landscape of digital assets.
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