Bitcoin bounces back during Covid-19 - but will it last?

Nevertheless, the questions many people are asking are - why has Bitcoin’s price risen so dramatically during such a turbulent period? Why are the Fed’s policies impacting the price of bitcoin? The answer potentially lies in the way many investors perceive bitcoin as a hedge against inflation. In fact, Venezuela is one of the few cases in the world where bitcoin’s use has been a lifeline for those whose livelihoods have been ravaged by hyperinflation. Global Crypto Adoption Index ranks Venezuela within the top 3 countries in the world with the highest rates of cryptocurrency usage in the world.

US inflationary pressure

Although comparing the US’ future trajectory to such a catastrophic scenario is an over-exaggeration, many investors are concerned that the Fed’s aggressive monetary policy may lead to inflationary pressures down the line. In Jerome Powell’s recent speech at a virtual meeting of the annual Jackson Hole economic symposium, an announcement was made to agree a policy of “average inflation targeting” which will allow inflation to run moderately above 2% for some time. However, it is the Fed’s vagueness in explaining exactly what “moderately above 2%” means which has investors concerned. After all, inflation eats away at people’s savings, and coupled with Powell’s insistence that interest rates will remain close to 0% to allow for inflation to run higher, it may provide the perfect fuel for bitcoin as investors look for greater returns on their cash holdings.

The Fed’s lax monetary policy also does not look like easing off anytime soon - its money printing machine will need increased maintenance if we add a dollop of US politics into the equation. It was many years ago that the Republican party campaigned on issues such as fiscal prudence and promised to shrink the size of government. How times have changed. Now, the Republicans and Democrats are debating on how much money to spend on supporting US businesses and citizens during the crisis. The Republicans initiated talks with the Democrats by presenting their $1 trillion spending plan, whereas the opposing side is holding out for a $3 trillion stimulus which will lead to the debt-to-GDP ratio rising above 100% next year. A shrinking US economy will only exacerbate the ratio. This has the potential to dilute the value of the US dollar as its global reserve currency status comes under increased strain.

US Dollar decline

However, the US dollar has in fact been in decline during the pandemic and is another factor that should not be overlooked in the upsurge in the price of Bitcoin. There appears to be a positive correlation between the Fed’s money-printing and the decline in the value of the dollar which in tandem bodes well for bitcoin as it is priced in the US currency. As the US dollar falls, assets that are priced against it are likely to rise. Although, this explanation might be oversimplified.

Bitcoin halving

The bitcoin halving that took place in May 2020 might also explain why Bitcoin has performed so well in recent months. Here, rewards for bitcoin mining are now 50% lower for verifying transactions and with this tightening of the supply it should provide a bullish scenario for the asset over time. If history is anything to go by and the price of Bitcoin repeats what it did following the last halving in 2016, then Bitcoin could hit $340k according to analysts.

There may be multiple reasons to explain why Bitcoin has performed so well since March 2020. However, the main one appears to be the Fed’s money printing which does not look like coming to an end anytime soon. If you add the current political climate which includes ambitious government spending plans from the Democrats around infrastructure, a Green New Deal and Medicare for All, and given the strong chance they have in winning November’s Presidential elections, then it should not be a surprise that there is pressure on the US dollar which is only positive for bitcoin as investors look for alternative investments.