How $1.9 trillion of stimulus could push Bitcoin’s price to a new all time high
The ongoing devaluation of the US dollar is just another feather in Bitcoin's cap.
- Bitcoin pushes higher to $51,693.
- US Congress passes a COVID-19 relief bill injecting $1.9 trillion into the economy.
- US dollar devaluation pushes money into riskier assets with Bitcoin as hedge against inflation.
Bitcoin is trading at $51,693 at the time of writing, which is a 4.6% increase in the last 24 hours according to pricing data released by CoinGecko. Momentum has been largely one way with the day's low being recorded 24 hours ago at $48,622.
The positive gains were enhanced by a brief 3.1% spike in the Bitcoin spot price jumping from $49,396 to $50,929 in one hour and 5 minutes. This spike coincided with the US Senate's approval of the $1.9 trillion stimulus package intended to pull America out of the COVID-19 recession.
There are two ideas that can be pointed to that might explain why the price of Bitcoin went up on the news of the "stimmy" cheques being passed. One is that with the injection of cash into the economy, markets are more risk prone. Which makes investments in Bitcoin, equities and real estate more attractive while bonds should become less attractive.
However, that is uncertain. Bond yields on the benchmark US 10 year treasury bond reached 1.62% the highest return since February of 2020, just as the COVID-19 panic was starting to grip the world. Bond markets will open in the US on Monday morning and analysts will watch the effect on bond yields closely.
Devaluation of the US dollar
The second idea that could be causing the jump in the price of Bitcoin is the expected devaluation of the US dollar. The graph below shows the change in the value of the US dollar from 2000 to 2021 (based on 1982-84 consumer prices).
Today, long time futures and foreign exchange trader Peter Brandt, tweeted that the inflationary cycle of the US dollar "has only just begun." Pointing to the graph below, Brandt says that Bitcoin will continue to rise in response to the ongoing devaluation of the US dollar.
According to the graph, which is taken from St. Louis Federal Reserve website using numbers from the US Bureau for Labour Statistics, the purchasing power of today's US dollar is only around 37.5% of the value it was in 1982-1984. With inflation increasing in the consumer price index continuing, that process of US dollar devaluation is likely to be maintained.
Bet against the US dollar?
For that reason, markets may see the recent stimulus packages as being inflationary in the long term which may lead to an acceleration in the ongoing devaluation of the US dollar, in terms of purchasing power. With Bitcoin being seen largely as a hedge against inflation, it follows that the price of Bitcoin would be positively affected by the devaluation of the US dollar.
While some might say "never bet against America" the ongoing discount in the purchasing power of the US dollar is cause for concern and pushing up the price of Bitcoin.
What can be seen from the graph is that the strongest increase in the purchasing power of the US dollar occurred during The Great Recession. So the question becomes how does the US dollar maintain its purchasing power as well as an economic surplus? And will purchasing Bitcoin one day become necessary to protect against inflation from a devaluing US dollar?
Disclosure: The author owns a range of cryptocurrencies including at the time of writing