Two years ago, central bankers told the world inflation had been beaten.
Since then, it has returned across the developed and emerging world, and for anyone thinking seriously about where Bitcoin fits in a long-term portfolio, the timing could hardly be more significant.
Prices in the eurozone are rising at 3.8%, the fastest pace in three years. US inflation has climbed to 3.7% and has stayed above the Federal Reserve’s 2% target every month since March 2021. Australia is running at 4%, Britain at 3.1%, and India at 5.54% after six consecutive monthly increases.
Even China, which spent years exporting low prices to the rest of the world, is seeing factory prices rise at their fastest pace since mid-2022.
For some time now, I’ve argued that this wave of inflation is likely to prove far more stubborn than policymakers expected.
Prices beyond fuel and food are rising, European businesses are planning further increases, and governments across major economies are running large deficits. A swift return to the low inflation of the 2010s looks increasingly unlikely.
This backdrop goes to the heart of why Bitcoin exists.
Every government currency loses purchasing power over time, and periods like this one speed up the process. Cash held at today’s US inflation rate loses half its value in under 20 years.
Bitcoin offers something no central bank can match: a supply capped at 21 million coins, around 20 million of which are already in circulation, with new issuance halving every four years.
Nobody can vote to create more of it, and no committee can decide to inflate it away.
When confidence in the value of money starts to fray, that scarcity becomes more compelling. Persistent inflation also exposes an awkward truth about heavily indebted governments.
Rising prices reduce the real value of what they owe, which gives them limited incentive to drag inflation all the way back to target. Investors increasingly understand this, and it’s one reason demand for assets outside the traditional financial system keeps growing.
The bullish case does need to be weighed against short-term reality. Bitcoin has tended to struggle when central banks raise rates aggressively.
In 2022, as inflation hit four-decade highs and the Federal Reserve hiked hard, Bitcoin fell sharply alongside technology stocks.
Central banks are tightening again, with the European Central Bank, the Federal Reserve and Australia’s central bank all raising rates this year, and that could weigh on prices in the months ahead.
Volatility remains part of owning Bitcoin, and investors should be prepared for it.
Tightening cycles do end, though. Central banks are raising rates into an energy-driven price shock they can’t directly control, and there’s a limit to how far they can push before growth weakens and government borrowing costs become hard to sustain.
It’s likely that policymakers are likely to pivot back towards easing once that point arrives, even if inflation is still above target. Periods of easier money have historically been powerful tailwinds for Bitcoin.
The market has also matured considerably since 2022. Regulated investment products now give pension funds, wealth managers and institutions straightforward access, and a growing number treat Bitcoin as a long-term strategic holding. A deeper and broader base of owners tends to make an asset more resilient through market cycles.
Bitcoin can swing hard in either direction over weeks and months, and it won’t track monthly inflation data neatly.
But over longer horizons, its value as protection against the steady debasement of fiat currencies, driven by persistent inflation and heavy government borrowing, becomes much clearer.
Bitcoin was created in the aftermath of the 2008 financial crisis as a response to exactly this kind of erosion in the value of money.
Nearly two decades on, with inflation back across several continents and governments showing little appetite for the pain needed to crush it, the conditions that inspired it look as relevant today as at any point in its history.
Author Bio
Nigel Green is deVere Group CEO and Founder
Disclaimer: This article is for general information purposes only and doesn’t constitute investment or financial advice. Always do your own research and consider seeking independent professional advice before making any investment decision.