If you’ve perused Crypto Twitter over the past few months, you know the obsession of Bitcoin investors and inflation, specifically hyperinflation; if you ask an investor in the cryptocurrency why they buy BTC, they’re likely to mention something regarding the hyperinflationary collapse of Zimbabwe’s currency.
It’s natural: unlike fiat currencies which can be printed at the whim of central banks and governments, Bitcoin is strictly scarce, with the protocol ensuring that only 21 million coins will ever be mined and sent through the blockchain. Inflation, of course, should help an asset that is scarce and in demand.
But, over the past few weeks, with the collapse in the price of oil and a dramatic drop in the velocity of money, there’s been a serious discussion of an impending deflationary cycle. Deflation meaning that the value of your dollar actually increases, which should theoretically promote hoarding and decrease the value of assets.
But, a top macro analyst recently suggested that a deflationary “wave” could help Bitcoin in the longer run. Here’s how.
Signs of Deflation
Over the past few weeks, due to the mandatory lockdown put in place around the world, the demand for goods and services has fallen off the face of the Earth, epitomized by the collapse of certain oil barrels to $0, even negative prices. Seriously.
With this, it is clear that deflation, which is caused by a large decrease in demand or the velocity of money, is on the horizon.
With one of the largest deflationary waves in modern history underway, the chances of negative CPI is very high. That might mean the Fed will do the unthinkable in the coming months and go to negative rates or if not, monetary conditions will be tightening into a crisis 1/
— Raoul Pal (@RaoulGMI) April 3, 2020
The issue is, to stave off deflation and a brutal recession, the Federal Reserve and the world’s central banks and governments are being forced to activate every monetary measure they have in their power to keep the gears of the economy moving.
According to Raoul Pal of Global Macro Investors, with this in mind, “that might mean the Fed will do the unthinkable […] and go to negative rates,” before pointing to charts that show the Federal Funds and 10-year Treasury Bond yields are on the verge of heading negative.
Regardless, he seemed certain that deflation is coming, calling the chances of a negative CPI (inflation measure) reading “very high.”
Could Be Huge For Bitcoin
Again, while the main thesis around Bitcoin investment is to stave off the inflation of fiat dollars, a deflationary event could seriously benefit Bitcoin, analysts say.
Pal, for instance, explained that with the current macro backdrop “Dollars, Gold, and Bitcoin make the most sense,” adding that he is positioning his portfolio for 18 months to 36 months out, seemingly suggesting he doesn’t expect deflation to happen just yet.
Dollars, Gold and Bitcoin make the most sense. Later, much later, just gold and bitcoin.
This is an 18 month to 36 month view. Expect many counter-trend moves along the way. We will have to navigate those.
— Raoul Pal (@RaoulGMI) April 3, 2020
Pal didn’t expand on his points, but it’s easy to see why he has a growing interest in gold and Bitcoin considering what he said.
Firstly, negative interest rates decrease the opportunity cost of owning assets that yield 0%, such as gold and Bitcoin. Why hold a bond yielding -0.5% a year when you could hold a scarce asset with room for upside that yields 0%?
And secondly, Jeff Booth, a Canadian technology entrepreneur and author of The Price of Tomorrow, suggested in a recent interview with Real Vision that deflation is likely to dramatically worsen the world’s debt load. Why?
Well, despite rates being zero or even negative, a deflationary environment would mean that the real value of debt, most of which was accumulated in the inflationary environment of the early-2000s or 2010s, would increase, leaving many debtors with a bigger and bigger hole to dig out of.
In other words, the chance of defaulting on debt should increase in a period of deflation, which in turn may erode trust in institutions, forcing individuals to seek alternatives like gold and Bitcoin, Booth said in the interview.