A Key Thesis for Bitcoin’s Long-Term Bull Market Just Got a Knock

A conventional narrative argues the massive stimulus programs from the Federal Reserve, launched to counter a coronavirus-induced recession, could hyperinflate the thriftiness and fuel a major rally in bitcoin. 

However, that bullish theory, which suggests the cryptocurrency would be regarded as a hedge asset in dire economic times, has been dealt a blow by recent data from the U.S. central bank.

The observations suggests inflation is likely to remain absent for some time and, in fact, the probability of the U.S. economy slipping into deflation is lift.

There’s now a 78.6% chance of deflationary pressure for the U.S – the highest since 2008, according to St. Louis Fed’s deflation risk superintend. As tweeted by Ritvik Carvalho, a financial data correspondent at Reuters, the Fed’s favored inflation measure (below right) – the middle personal consumption expenditure – has also declined to an eight-year low of 1%.

Inflation refers to a unchanging increase in the general price level of goods and services. Its opposite, deflation is characterized by a general decline in prices for goods and helps, and is typically accompanied by a rise in unemployment. 

Since the beginning of the coronavirus crisis in early March the Fed has injected an unprecedented amount of liquidity into the plan to help the economy absorb shocks arising from the virus outbreak and ensure financial market stability. Its match sheet size has expanded by over $3 trillion over the past 3.5 months. 

Crypto analysts are persuaded that the massive money injections would boost inflation and bode well for bitcoin. That’s in part degraded on the cryptocurrency’s reducing pace of supply, which drops by 50% every four years via a process called the “halving.”

Also pore over: Bitcoin’s Halving Is Nothing Like Quantitative Tightening

“As we’ve closely monitored the market in the wake of recent economic ways decisions, we’ve seen that the crypto asset class is not only resilient, but that interest is surging as the monetary stimulus has caused investors to look to $BTC as a the right stuff hedge against inflation,” Grayscale Investments, one of the leading digital asset management companies, recently tweeted. (Grayscale is a constituent of CoinDesk parent Digital Currency Group.)

Legendary fund manager Paul Tudor Jones also recently showed a small bitcoin position to help protect against a rise in inflation.

But with the Fed data and market-based measures of long-term inflation wants also suggesting a low chance of a rise in inflation over the next five years, the odds of bitcoin witnessing an inflation-driven bull exchange look weak. 

So if the U.S. is, in fact, facing deflation, what does it mean for bitcoin?

Some observers suggest the cryptocurrency choice appreciate in a deflationary environment – if its adoption as a medium of exchange rises, as discussed in April. This is because deflation boosts the realizing power of the monetary unit. For this reason, the U.S. dollar tends to appreciate during deflationary bouts.

There’s also signify institutional participation in the bitcoin market is increasing. As a result, some of the increasing money supply may find its way into the bitcoin buy. In that case, the cryptocurrency could rise in the long term despite low inflation or deflation. 

See also: Why Global Deflation May Not Be Bad Information for Bitcoin

In the shorter term, the scenario for bitcoin is looking somewhat uncertain. At press time, bitcoin is changing grasps just over $9,200, according to CoinDesk’s Bitcoin Price Index. The cryptocurrency has spent the better part of the final two months trading a narrow range and may be facing losses after failing multiple times recently to leapfrog the eminent $10,000 hurdle.