Inflation, Velocity, & Bitcoin

BTC News #37

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Instead of looking at specific on-chain metrics today, I wanted to cover something interesting I read in the Uncharted newsletter. There has been a lot of talk about inflation as the US and most countries continue to print money. Jerome Powell continues to emphasize that they have not reached the inflation levels they want and still remain below 2%. Many people find that hard to believe as they continue to print unprecedented amounts of new money supply.

What creates inflation? An increase in money supply and velocity of money. If money is printed but it is not circulated through the economy by people spending it then inflation will not pick-up.

As we can see in the chart above, the US is at record lows when it comes to the velocity of M2 Money Supply. Put simply, this means people aren’t spending the stimulus cheques or their money in general.

This is further proven when we look at personal savings rate.

Pre-Covid savings levels remained flat, while post-Covid they spiked big time and remain high.

The fact is people are choosing to save their money, likely out of uncertainty of what to expect in the future. This not really surprising as people want to protect what they have as a precautionary measure.

So, what happens as things open back up? Do you people continue to save or start to spend? It’s definitely a tough one to try and predict. On one hand, people have been locked up for over a year and likely want to get out and travel, go to a show, or dine at a restaurant. On the other hand, many people have fled the city for rural living, got used to working from home, or developed different fears of being out in public.

The markets have been pricing in inflation as US 10-year Treasury yields have been rising aggressively and showing no signs of slowing down. This is known as the reflation trade which has been a hot topic as of late.

The reflation trade has been rough on growth like tech stocks because inflation causes prices to rise and decreases the purchasing power of consumers. They are unable to purchase as many goods and services and profits begin to decline. It becomes tough for growth companies to continue growing in that type of market environment.

What does this all mean for Bitcoin?

Well, Bitcoin was created for this exact reason. Centralized governments printing endless amounts of money to keep the economy growing while simultaneously de-valuing peoples savings and lowering consumers buying power. Hence, store of value.

Trillions of dollars being printed, PayPal, VISA, Telus, Microstrategy, and now Goldman Sachs all getting involved with Bitcoin is some capacity. On-chain metrics looking extremely bullish despite a massive BTC price increase already.

What do you think will happen?

It will be interesting to see how people respond to the economy opening back up. Velocity of money is definitely a metric to keep on your radar.

In the news…

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Nothing in this article is investment advice. I’m not a financial advisor. Do not make investment decisions based on what is in this article or any other article written by BTC News or Blockedia.