Inflation Speculation Amidst Bitcoin Scarcity

The stock and crypto market had a rocky week, causing downside pressure for Bitcoin, altcoins and tech stocks. The dip is thought to be partly due to J. Powell of the Federal Reserve testifying before Congress on the economic outlook, recovery and proposed plans for the Feds intervention or lack thereof in the economy.

As the vaccine continues to roll-out to millions of Americans, the economy is starting to recover, businesses are re-opening and people are gradually returning to work. While this is positive, the economic recovery entails that the Fed’s active involvement in stimulating the economy is less dire and urgent. However, they do plan to monitor it closely for on-going intervention.

This also came with commentary regarding inflation. Powell stated that inflation should not see a drastic increase, which has been the big concern of investors who fear that the trillions of dollars printed for stimulus entering the economy would cause runaway inflation and devalue the dollar. As of now, over 90-million stimulus checks from the latest stimulus round have hit people’s bank accounts, and news released that Biden is planning an additional $3 Trillion economic stimulus plan (CNBC).

The statements on economic recovery and the comments on inflation caused the value of the US Dollar (DXY) to spike and stocks and crypto to dip, but just how realistic is it that trillions of dollars entering the economy won’t spike inflation? We’ll see.

Given that Bitcoin is often viewed as an inflation hedge, it’s reasonable to believe that the proposed alleviation of inflation concerns on face-value would cause some rotation back into the dollar. Considering this in tandem with the 6.1 billion dollars of Bitcoin options set to expire this Friday, many wonder if institutions and funds are taking profits causing downward pressure and resetting their expectations based on the economic outlook (CoinTelegraph).

However, the bullish news for Bitcoin and its adoption has not let off the gas, and the market bounced strongly today. This week we also received information that Fidelity, who has $5.9 trillion under management, filed for a Bitcoin ETF with the SEC (Investopedia). While Canada now has a Bitcoin ETF, regulators have been slow to approve one in the States. Perhaps this time will be different.

This week’s biggest news was that Tesla is now accepting Bitcoin as a payment option for its fleet of vehicles (DeCrypt). Not only are they accepting Bitcoin, but they also plan to hold it on their balance sheet as opposed to converting it back to fiat.

Perhaps the most interesting component of this recent downtrend is that massive outflows of Bitcoin and Ethereum are leaving major exchanges into private wallets at a rapidly increasing rate, showing that institutions are still accumulating at current price levels (CoinDesk).

The acceleration of institutional outflows has now resulted in a record-low amount of Bitcoin and Ethereum being available on exchanges. It appears that there is a significant supply shock in Bitcoin and Ethereum’s near-future. Outflows are proof that demand hasn’t dried up, but supply most certainly has started to.

It’s safe to say we all know what happens when demand outweighs supply and what that means for price action. For now, we’ll follow the flow.