Bitcoin Rallies Against Modest Uptick in Inflation

Bitcoin continued to rally Wednesday despite a tepid inflation report that would have strengthened its standing as a hedge against the declining value of the dollar.

In midday trading Wednesday, Bitcoin changed hands at $56,864.92, up 5.36% in the last 24 hours, CoinDesk reported. In the last five days, Bitcoin, the leading cryptocurrency based on its $1 trillion market cap, has rebounded from about $47,000. It reached its all-time high of $58,332.36 in February.

"The narrative that Bitcoin is a good hedge against inflation is, in our view, a robust one that appears to be firmly adopted by key players in the market for the time being," Jason Deane, Bitcoin Analyst, Quantum Economics, London, told Newsweek. "A single report is unlikely to change this, especially when many investors are taking the long, or even very long, time horizon when the effects of devaluation are certain to be felt."

Deane said the long-term outlook for Bitcoin remains strong.

"There is an enormous amount of activity around the Bitcoin markets at the moment," he said.

"It is clear that institutional buys are continuing, and recent large Bitcoin purchases reported by Coinbase may be evidence of that happening," Deane said. "Education among corporates appears to be accelerating and on-chain data from Glassnote seems to indicate that retail adoption is also growing significantly. This combined with continued falling liquidity on exchanges, has led to a classic demand and supply imbalance allowing Bitcoin to return to previous highs and possible new price discovery."

The consumer price index, a measure of prices consumers pay for routine items, including food and clothing, rose a seasonally adjusted 0.4% in February from January, the U.S. Bureau of Labor Statistics reported Wednesday.

Gasoline prices increased 6.4% over January, accounting for more than half the increase. The cost of electricity and natural gas rose 3.9%. New car prices remained flat.

But the core price index, which excludes often volatile food and energy, increased 0.1% in February from January and was 1.3% higher than the same period a year ago. Core prices hadn't budged in the previous three months.

Overall, consumer prices increased modestly. Analysts said the increase was driven by increased demand for goods and services as the economy rebounded from the COVID-19 shutdown, and also by severe winter weather that increased demand for heating.

Nevertheless, the modest uptick in inflation is bad news for small savers who typically earn less than 0.50% on money market accounts, making Bitcoin attractive for those who can tolerate the risk and manic price swings.

"You would normally offset some, if not all, of the effect of currency devaluation via interest bearing instruments," Deane said, "but this is simply not possible in the current environment, not is it likely to be for some time."

He said the ease of acquiring Bitcoin gives the currency an advantage.

"Since Bitcoin is easy to buy and hold, and many argue already has a proven track record, it makes it a logical purchase decision," Deane said.

Analysts expect prices to increase 2.2% overall this year as the pandemic abates and the economy restarts. In 2020, inflation totaled 1.4%, below 2019's 2.3%. Core inflation is expected to be about 2.2% in 2021. It was 1.6% at the end of last year.

Bond investors had bet that the economic rebound and increased government spending would lead to higher inflation. However, the dollar strengthened and the yield on the 10-year U.S. Treasury bond stabilized.

A $1.9 trillion coronavirus aid package is expected to reach President Joe Biden's desk this week. The Bitcoin faithful believe the measure will stoke inflation and further undercut the dollar's standing as the world's reserve currency.

Market Pulse

The rocket-like rally and subsequent crash of video game retailer GameStop's stock in January has revived talk of a financial transaction tax. In early midday Wednesday, GameStop fell 12.52% to $216 a share after posting gains for five consecutive days.

"One way to ensure that this enormous wealth generated on Wall Street actually reaches the real economy is to enact and look at proposals like a financial transaction tax," Rep. Rashida Tlaib (D-Michigan) said last month at a hearing of the House Financial Services Committee.

Rep. Peter DeFazio (D-Oregon), chair of the House Committee on Transportation and Infrastructure, has sponsored an infrastructure bill, the Moving Forward Act, which has attracted 27 co-sponsors, including House Majority Whip James Clyburn (D-South Carolina).

Senator Bernie Sanders, a Vermont Independent who caucuses with the Democrats, has frequently advocated a transaction tax, but his proposal has gone nowhere.

The Senate is now split 50-50 between Democrats and Republicans, but the measure could be passed through budget reconciliation, a process that permits the Senate to adopt tax and spending bills on a simple majority vote. If the Senate is deadlocked, Vice President Kamala Harris casts the deciding vote.

Critics argue that a tax on stock transactions would hurt investors by increasing costs and eroding returns. In New York, some state legislators seek to revive a state tax on stock trades that hasn't been collected since 1981.

The New York Stock Exchange and business groups argue that such a tax would force financial firms out of Manhattan, undercutting the economy and reducing city and state income tax revenue.

With current computer technology, major stock exchanges could move to a low-tax state such as Florida, Texas or North Carolina to avoid the New York state tax, critics note.