3 ms·

You'd think an intrinsically deflationary asset like Bitcoin would move differently in the face of USD inflation. Any explanation for why this might be?

by gradys 5y ago

lvs 5y ago
Because it's backed by the full faith and credit of absolute void.
- dboreham 5y ago
  /dev/null
- BitwiseFool 5y ago
  Are you talking about the Dollar?
  - selectodude 5y ago
    Gotta hold dollars to pay US taxes. Don't need to hold Bitcoin to do anything at all.
- imtringued 5y ago
  Technically it is backed by guns, guns that convince other nations to trade in USD and guns that convince US citizens to pay taxes so that the guns are pointed at those who don't pay them. The other factor is that the US has adopted the USD. The actual reason (e.g. guns) doesn't matter, it only matters that the decision has been made. You can buy things in the US with USD. Therefore the value of the USD is tied to how much stuff a dollar buys you. The size of the Bitcoin economy is quite small. There are not many things whose price is denominated in Bitcoin, most shops just convert from the dollar price to Bitcoin, which means there is barely any price stickiness that keeps the value of Bitcoin stable. If anything it supports the instability of the exchange rate.
rjknight 5y ago
Inflation figures are a leading indicator of US monetary policy. All other things being equal, higher inflation readings now means relatively tighter US monetary policy later on. Yes, the Fed has committed to allowing some >2% inflation to make up for past <2% inflation, but it's still the case that policy might tighten one day, and higher inflation now still brings that day closer than it would have been with lower inflation.
- imtringued 5y ago
  Yes, it's true, but persistent inflation requires persistent supply problems. I don't know anything about the gasoline pipeline but if they can't get it to work within a year it is going to cause persistent inflation. If they can get it fixed, gasoline inflation will go away. The Fed is betting that these incidents will resolve themselves, which is why raising rates may not be the best course of action. It's the same thing with Turkey, Argentina, Zimbabwe etc. They suffered from poor farm yields. Turkey needs more investment into agriculture chemical companies, Argentina suffered a drought in 2018, Zimbabwe had land repossession but financial problems and lack of education prevent the new owners from farming on the land they acquired for free. If Turkey can do enough investments it can solve its agriculture problems. If Argentina can diversify away from agriculture it will be less prone to droughts. If Zimbabwe supports farmers it can become self sufficient again. These are examples of persistent shortages, something fundamental broke there and the only way this can be fixed is by raising interest rates, crashing hard and then reallocating the economy to the things that are actually important.
SamReidHughes 5y ago
Maybe people are selling it to buy cheap stocks.
- imtringued 5y ago
  Commodities are going up, because they are inflation hedges.
whitepaint 5y ago
That is just a ridiculous statement. If you want a hedge against inflation you'd buy something like shares of McDonald's (people will keep eating burgers), gold and other commodities, things that people need. No one actually needs Bitcoin. If Bitcoin disappeared right now, who would lose besides the people who hold Bitcoin? No one. If you want to circumvent the banks there are other ways to do so and very easily so. It's the biggest speculative bubbles of all time. And at the same time I believe it's a very important innovation by the way (solving the double-spending problem, or more precisely, making it good enough).
- gradys 5y ago
  What is ridiculous exactly? That it's deflationary? Or the intuition that it should rise in the face of USD inflation (all else equal)?
  - whitepaint 5y ago
    That it should rise because of USD inflation.
    - chanc3e 5y ago
      Well put. The fundamentals are: pretty much everything in this world has a known fiat currency value. The difference with BitCoin is that you can't go to a farmer and buy his goods, or pick up a used car, go to an auction, or take a wedge of greenbacks and disappear. Until that becomes a ready reality, BitCoin is separate from actual trade, and completely vulnerable to speculation. Currencies are a shared dream, stop believing and they Tinkerbell. That said, a BitCoin does have a definitive value, and won't go away. But it's certainly not $50k.
    - imtringued 5y ago
      Exactly, this misconception is being repeated everywhere. It often goes up with inflation, not because of it. An asset with shrinking circulating supply will go up in price. It's self reinforcing because hoarding reduces the circulating supply. This is deflation and it's self reinforcing nature is why it is considered bad in economics. This happens completely independently of USD inflation. If USD inflation goes up then Bitcoin may go up by the same amount. However, inflation may affect hoarding instincts in either direction, which can wipe out the influence of inflation on the price of Bitcoin. For example, people may liquidate Bitcoin to buy commodities that are going up in price. The gasoline pipeline incident causes a shortage of gasoline, people start hoarding gasoline because it goes up much faster than the CPI average but Bitcoin itself can only protect against the CPI because Bitcoin holders want to buy things other than gasoline. If you are a consumer that needs nothing except gasoline then you would believe your Bitcoin are worth "CPI Bitcoin price" * (1+gasoline inflation rate). E.g. 25% gasoline inflation means it is worth 25% more than market rate, because you need 25% extra just to stay where you are. The obvious problem is that there are some goods that went down in price. Assuming 20% deflation, someone else is willing to accept 20% dollars less for his Bitcoin. The average of both is 5%, therefore the "CPI Bitcoin price" would go up 5%. However, since the gasoline guy wants the 25% gains, it makes more sense to liquidate Bitcoin and buy gasoline directly but the deflation guy remains, which paradoxically drags the price of Bitcoin below inflation because it no longer tracks CPI but rather the CPI without the things that went up.
paulpauper 5y ago
bitcoin, like gold, is only an effective hedge against a currency that is falling relative to the US dollar. If you have dollar-denominated assets , such as stocks, there is no need for Bitcoin to hedge inflation.
mateuszf 5y ago
> You'd think an intrinsically deflationary asset like Bitcoin would move differently in the face of USD inflation. Any explanation for why this might be? I guess because right now a big percentage of bitcoin price comes from speculation and not from people realizing its deflationary potential. Which probably will change in future.

You'd think an intrinsically deflationary asset like Bitcoin would move differently in the face of USD inflation. Any explanation for why this might be?

by gradys 5y ago

You'd think an intrinsically deflationary asset like Bitcoin would move differently in the face of USD inflation. Any explanation for why this might be?

lvs 5y ago

Because it's backed by the full faith and credit of absolute void.

dboreham 5y ago
/dev/null
BitwiseFool 5y ago
Are you talking about the Dollar?
- selectodude 5y ago
  Gotta hold dollars to pay US taxes. Don't need to hold Bitcoin to do anything at all.
imtringued 5y ago
Technically it is backed by guns, guns that convince other nations to trade in USD and guns that convince US citizens to pay taxes so that the guns are pointed at those who don't pay them. The other factor is that the US has adopted the USD. The actual reason (e.g. guns) doesn't matter, it only matters that the decision has been made. You can buy things in the US with USD. Therefore the value of the USD is tied to how much stuff a dollar buys you. The size of the Bitcoin economy is quite small. There are not many things whose price is denominated in Bitcoin, most shops just convert from the dollar price to Bitcoin, which means there is barely any price stickiness that keeps the value of Bitcoin stable. If anything it supports the instability of the exchange rate.

rjknight 5y ago

Inflation figures are a leading indicator of US monetary policy. All other things being equal, higher inflation readings now means relatively tighter US monetary policy later on. Yes, the Fed has committed to allowing some >2% inflation to make up for past <2% inflation, but it's still the case that policy might tighten one day, and higher inflation now still brings that day closer than it would have been with lower inflation.

imtringued 5y ago
Yes, it's true, but persistent inflation requires persistent supply problems. I don't know anything about the gasoline pipeline but if they can't get it to work within a year it is going to cause persistent inflation. If they can get it fixed, gasoline inflation will go away. The Fed is betting that these incidents will resolve themselves, which is why raising rates may not be the best course of action. It's the same thing with Turkey, Argentina, Zimbabwe etc. They suffered from poor farm yields. Turkey needs more investment into agriculture chemical companies, Argentina suffered a drought in 2018, Zimbabwe had land repossession but financial problems and lack of education prevent the new owners from farming on the land they acquired for free. If Turkey can do enough investments it can solve its agriculture problems. If Argentina can diversify away from agriculture it will be less prone to droughts. If Zimbabwe supports farmers it can become self sufficient again. These are examples of persistent shortages, something fundamental broke there and the only way this can be fixed is by raising interest rates, crashing hard and then reallocating the economy to the things that are actually important.

SamReidHughes 5y ago

Maybe people are selling it to buy cheap stocks.

imtringued 5y ago
Commodities are going up, because they are inflation hedges.

whitepaint 5y ago

That is just a ridiculous statement. If you want a hedge against inflation you'd buy something like shares of McDonald's (people will keep eating burgers), gold and other commodities, things that people need. No one actually needs Bitcoin. If Bitcoin disappeared right now, who would lose besides the people who hold Bitcoin? No one. If you want to circumvent the banks there are other ways to do so and very easily so. It's the biggest speculative bubbles of all time. And at the same time I believe it's a very important innovation by the way (solving the double-spending problem, or more precisely, making it good enough).

gradys 5y ago
What is ridiculous exactly? That it's deflationary? Or the intuition that it should rise in the face of USD inflation (all else equal)?
- whitepaint 5y ago
  That it should rise because of USD inflation.
  - chanc3e 5y ago
    Well put. The fundamentals are: pretty much everything in this world has a known fiat currency value. The difference with BitCoin is that you can't go to a farmer and buy his goods, or pick up a used car, go to an auction, or take a wedge of greenbacks and disappear. Until that becomes a ready reality, BitCoin is separate from actual trade, and completely vulnerable to speculation. Currencies are a shared dream, stop believing and they Tinkerbell. That said, a BitCoin does have a definitive value, and won't go away. But it's certainly not $50k.
  - imtringued 5y ago
    Exactly, this misconception is being repeated everywhere. It often goes up with inflation, not because of it. An asset with shrinking circulating supply will go up in price. It's self reinforcing because hoarding reduces the circulating supply. This is deflation and it's self reinforcing nature is why it is considered bad in economics. This happens completely independently of USD inflation. If USD inflation goes up then Bitcoin may go up by the same amount. However, inflation may affect hoarding instincts in either direction, which can wipe out the influence of inflation on the price of Bitcoin. For example, people may liquidate Bitcoin to buy commodities that are going up in price. The gasoline pipeline incident causes a shortage of gasoline, people start hoarding gasoline because it goes up much faster than the CPI average but Bitcoin itself can only protect against the CPI because Bitcoin holders want to buy things other than gasoline. If you are a consumer that needs nothing except gasoline then you would believe your Bitcoin are worth "CPI Bitcoin price" * (1+gasoline inflation rate). E.g. 25% gasoline inflation means it is worth 25% more than market rate, because you need 25% extra just to stay where you are. The obvious problem is that there are some goods that went down in price. Assuming 20% deflation, someone else is willing to accept 20% dollars less for his Bitcoin. The average of both is 5%, therefore the "CPI Bitcoin price" would go up 5%. However, since the gasoline guy wants the 25% gains, it makes more sense to liquidate Bitcoin and buy gasoline directly but the deflation guy remains, which paradoxically drags the price of Bitcoin below inflation because it no longer tracks CPI but rather the CPI without the things that went up.

paulpauper 5y ago

bitcoin, like gold, is only an effective hedge against a currency that is falling relative to the US dollar. If you have dollar-denominated assets , such as stocks, there is no need for Bitcoin to hedge inflation.

mateuszf 5y ago

> You'd think an intrinsically deflationary asset like Bitcoin would move differently in the face of USD inflation. Any explanation for why this might be? I guess because right now a big percentage of bitcoin price comes from speculation and not from people realizing its deflationary potential. Which probably will change in future.