Bitcoin Is Rising, Gold Is Falling, and the Euro Is Slumping - and It's All Linked

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Bitcoin Is Rising, Gold Is Falling, and the Euro Is Slumping – and It’s All Linked

Bitcoin Is Rising, Gold Is Falling, and the Euro Is Slumping - and It's All Linked
(Mike Kemp/Tetra Images/Getty)
Source: CoinDesk
1658135007 18 Jul / 09:03

This week, the U.S. Bureau of Labor Statistics issued the consumer price index (CPI), sometimes known as the "inflation rate," for June. Since CPI was unattractive, this week's highlighted flavor is macro trends. Before seasonal adjustment, the all-items index grew 9.1 percent over the last year, according to a news statement.

Therefore, if you are an American who did not receive a 9.1 percent wage rise last year (which is the majority), everything is more costly. If you examine the components of that 9.1 percent, you will find that the truly essential items (i.e., food and energy) outperformed it. Food costs increased by 10.4%, while energy prices increased by 41.6%.

Consequently, gold, the traditional inflation hedging asset, should increase. Except it didn't? And bitcoin did that. Also, the euro is now a dollar-pegged stablecoin.

“Inflation is beneficial.” You can Google it. This allegation has been made in published papers. And they are sincere.

Inflation is beneficial since it benefits borrowers. This is sensible. If you have a $100,000 loan, that $100,000 does not change when prices rise. It remains $100,000. Therefore, your debt load is reduced if that $100,000 is a 30-year fixed-rate mortgage.

Assuming, of course, that your wages have grown enough to offset the rising cost of burritos. In the United States, salaries did not grow sufficiently. So, while inflation may benefit your mortgage, does it compensate for the 40 percent increase in gas prices and the 10 percent increase in burrito prices?

We require inflation. Google that as well. Numerous articles. All sincerity.

Given the time value of money, a deflationary currency – one whose value grows rather than falls over time – will lead to excessive saving (or “hoarding”) and a lack of consumption in the economy (TVM). TVM is the central principle of finance. Given the earning potential of a dollar, “a dollar today is more valuable than a dollar tomorrow.”

Except. This is a planet of whiteboards. In the real world, saving is perfectly acceptable. Also, and this should come as no surprise, individuals purchase items because they either a) need them or b) desire them. No one pulls out an HP-12C to decide if they want guacamole on their burrito. However, they may be implicitly performing a TVM computation.

There is a strong theoretical case for the 30-year fixed-rate mortgage discussed in the last section as an effective inflation hedge (but don’t tell Wall Street… again). However, gold is typically promoted as the ultimate inflation hedge. Gold has been used as currency for eons and is relatively scarce. And it is challenging to generate additional gold. We thus anticipate gold to grow proportionally during periods of high inflation.

But now we have gold 2.0 in the form of bitcoin. Here is how each has performed since the June CPI announcement.

Bitcoin said to gold, “Look at me now. I’m the commander.”

I realize this is a very brief, cherry-picked period, but it’s rather significant. Bitcoin is finally acting like one would expect gold 2.0 to perform. Perhaps bitcoin might be a hedge against inflation after all.

For the first time in twenty years, the euro reached parity with the U.S. dollar last week. Omkar Godbole of CoinDesk produced an excellent essay on what this may imply for cryptocurrency markets. In that piece, my old boss, Noelle Acheson of Genesis Global Trading, noted that bitcoin had been adversely connected with the dollar index for the previous few years.

This tendency has continued thus far this year. The dollar index has performed exceptionally well (up 12.3 percent), the euro relative to the dollar has not (-10.8%), and bitcoin has performed much worse (-56.1 percent ).

Putting aside crypto and my negative bias against the euro and its troika (who so graciously bailed out Cyprus, Ireland, Portugal, and Greece) for a moment, it will be interesting to see what the European Central Bank (ECB) does in response to a weakening euro, impending gas shortages, rising energy prices, and a recession. Difficult times in the eurozone might spawn difficult times abroad.

At least Fed Chairman Jerome Powell is not European Central Bank (ECB) President Christine Lagarde.

Fortunately (unfortunately?), it is 2022. And bitcoin is a severe macro asset in 2022. Thus, everything that occurs in the larger economy affects bitcoin. The Hard Times in crypto that I’ve written about in recent weeks may get even more complicated if the economy worsens.

Bitcoin might be a viable alternative to the present financial system, and a means to avoid inflation and poorly managed monetary unions. However, they are now bound together.

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