Yesterday, US CPI came in at 6.8%, just marginally above consensus expectations of 6.7%. However, Bitcoin fell as soon as the inflation data came in. I am sure many on Twitter and other media platforms have used this fall in Bitcoin price on higher inflation data as an argument for why Bitcoin is not a good bet against inflation. Many Bitcoiners will argue that Bitcoin is indeed the best bet against inflation arising from easy monetary policies around the world. So is Bitcoin a good inflation hedge?
In the last 10 years, Bitcoin has gone up 60,000x. That is a 200% rate of growth over each year, i.e. Bitcoin triples each year on average. Do Western economies, or even developing economies have an inflation rate of 200%? The answer is no. With fixed supply and rising acceptance, Bitcoin is probably the best bet against inflation OVER THE LONG RUN! Any economic policy takes years to permeate into the financial and social ecosystem. Analyzing policies on a short-term basis is futile. The same concept applies to Bitcoin. However, if it is known that Bitcoin is a good inflation hedge in the long run, then why aren't investors piling on to a near-perfect inflation hedge when high inflation numbers are released?
This is what Bitcoin did when US CPI came out yesterday. This is because Bitcoin is not defined by Bitcoin = function(inflation). There are many factors that impact Bitcoin price movement at any given time. The collective action of all investors is what determines the price action of any asset, including Bitcoin. And all these investors are not driven purely by how much increase in rental cost did they experience. Inflation isn't assessed over the short term either.
The argument about Bitcoin being an inflation hedge or not isn't valid over the short term. Also, the relationship will evolve in a better manner when all 21 million Bitcoin have come into existence.