Bitcoin’s Decline Correlates with S&P 500 Index Futures
On November 14, 2023, Bitcoin (BTC) traded down by 4.1% in response to US inflation data that marginally exceeded market expectations. This decline mirrored the S&P 500 index futures, which fell from 6,023 to 5,980 over four hours.
S&P 500 Index Futures (left) vs. Bitcoin/USD (right)
Source: TradingView
As a result of this correlation, traders are now questioning the extent of this correlation and when Bitcoin’s inflation-hedging attributes might offer some protection in an environment of persistent inflation.
The Role of Inflation in Shaping Market Expectations
The October US Producer Price Index (PPI) showed a 2.4% annual increase, slightly above the 2.3% consensus. However, this has not altered the consensus outlook for a 0.25% interest rate cut by the Federal Open Market Committee (FOMC) in December.
Federal Reserve’s Interest Rate Trajectory
Despite this, there is growing skepticism regarding the Federal Reserve’s ability to maintain its rate-cut trajectory through 2025. The persistence of inflation has raised concerns about the effectiveness of monetary policy in stimulating economic growth without fueling further price increases.
Bitcoin as a Hedge Against Inflation
Historically, Bitcoin has benefited from inflation concerns. However, in 2021 and 2022, government-led liquidity injections through stimulus checks and Fed balance sheet expansion dampened these effects. At that time, recession risk was minimal, despite rising costs.
Government-Led Liquidity Injections
Today, the situation has changed; while the labor market remains relatively strong, traders are cautious, anticipating potential corporate earnings pressures. The recent appointments of Elon Musk and Vivek Ramaswamy to lead a new government agency aimed at streamlining the bureaucracy and restructuring federal agencies are likely to result in some job losses and reduced funds available for investment from both individuals and businesses.
US Government Spending: A Threat to Bitcoin Demand?
One of Bitcoin’s primary roles is as an alternative reserve asset, offering a hedge against currency devaluation as governments expand their spending. If the US government successfully limits spending growth, demand for Bitcoin as an inflation hedge may decrease, as investors would see less risk in holding US dollars.
US Government Spending (left) vs. Bitcoin/USD (right, log)
Source: TradingView
However, it’s uncertain whether investors would indeed lose interest in Bitcoin’s scarcity value, given its appeal as a censorship-resistant, transparent asset. Unlike gold, stocks, or real estate, Bitcoin has an extremely predictable issuance schedule, which could support its demand even without direct competition with the US dollar.
Conclusion: Can Bitcoin’s Inflation-Hedging Attributes Withstand Persistent Inflation?
Bitcoin’s recent intraday movements have aligned with the stock market performance, reflecting concerns over persistently high inflation. Nevertheless, on a broader scale, the US fiscal challenges are likely to remain, as meaningful reductions in government spending are improbable amid recession risks.
US Fiscal Challenges: A Long-Term Concern
Ultimately, Bitcoin’s trajectory toward the $100,000 mark and beyond may withstand these temporary pressures stemming from short-term investor concerns regarding inflation. However, it remains to be seen how the interplay between government policies, monetary policy, and market expectations will shape the future of Bitcoin as a hedge against inflation.
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- US Government Spending: A Threat to Bitcoin Demand?
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This article is for general information purposes only and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
