Why U.S. Inflation Still Affects the Price of Bitcoin

This article briefly:

-The U.S. Personal Consumption Expenditures Index rose 2.9% annually and 0.2% monthly in December, indicating cooling in most sectors.

-The U.S. Treasury’s upcoming 2024 borrowing plan could affect investor interest in U.S. government bonds and bitcoin.

-A gold ETF co-founder said the approval of a bitcoin ETF should increase bitcoin adoption and establish bitcoin as a full-fledged investment vehicle.

Last December, the Federal Reserve’s preferred inflation gauge, the U.S. Personal Consumption Expenditures (PCE) index, rose 2.9% annually and 0.2% monthly. The so-called core PCE grows 0.1% per month but declines 3.2% per year, making for an interesting year ahead for Bitcoin.

Stock futures were slightly lower at the opening of the U.S. trading day, while cryptocurrencies and bitcoin were essentially flat. Prior to the U.S. inflation news, Bitcoin was trading slightly lower at $41,122.08, but recovered to $41,831.43 at press time.Bitmain Miner

Why U.S. Inflation Matters to Bitcoin

The PCE remains above the 2% target that the Fed uses to measure the effects of tightening. Since March 2022, the central bank has lowered the federal funds rate to between 5.25% and 5.5%, which has led to a significant cooling of prices in most sectors except housing.

US Annual Core PCE | Source: YCharts

People sell risky assets when they believe central banks may trigger a recession by tightening fiat monetary policy too aggressively. Investors then turn to more stable investments, such as government bonds, which have the full confidence of the government. When banks begin to cut interest rates, the price of risky assets such as Bitcoin could rise as risk appetite increases.

The U.S. Treasury Department is scheduled to announce its borrowing plan for 2024 on January 31st, 2024. An increase in government borrowing could indicate that the government is willing to take on more risk and reduce the attractiveness of government bonds, as more debt increases the likelihood of default. As a result, some investors may opt for Bitcoin.Whatsminer Miner

Why People Invest in Bitcoin

The approval of certain exchange-traded funds (ETFs) that directly track the price of bitcoin means that the asset has a chance to become a full-fledged investment vehicle.ETFs allow investors to have direct exposure to changes in the price of BTC without having to buy bitcoin directly.

Hector McNeil, co-founder of the first gold ETF, said the Bitcoin ETF vehicle will increase adoption. He likened it to how gold ETFs take the hassle out of digital asset management while encouraging more people to invest in the asset.

“ETFs are most powerful when they provide market access to hard-to-trade asset classes. [ETFs] democratize ownership. Having asset managers like BlackRock, Invesco and Fidelity is a huge endorsement.”

McNeil expects supply constraints on Bitcoin to gradually push the price higher. He argues that despite the fact that most investors don’t use it as a currency, Bitcoin is still seen as a means of storing value and that its technological properties make it well suited to function as a currency.