Bitcoin (BTC) fell 4.1% on November 14 due to US inflation data slightly exceeding market expectations. The decline was reflected in S&P 500 index futures, which fell from 6,023 to 5,980 in four hours.
As a result, traders are now questioning the extent of this correlation and the extent to which Bitcoin’s inflation-hedging properties may provide some protection in a persistent inflationary environment.
S&P 500 Index futures (left) and Bitcoin/USD (right). Source: TradingView
The US Producer Price Index (PPI) rose 2.4% annually in October, slightly above the consensus of 2.3%, but did not change the consensus forecast in December that the Federal Open Market Committee (FOMC) would cut interest rates by 0.25%. However, there is growing skepticism about the Fed’s ability to maintain its rate-cutting trajectory through 2025.
Bitcoin’s role as a hedge against persistent inflation
Historically, Bitcoin has benefited from inflation concerns. However, this effect was weakened in 2021 and 2022 by government-led liquidity injections through stimulus checks and expansion of the Federal Reserve’s balance sheet. At the time, the risk of a recession was minimal despite rising costs. Today things have changed. The labor market remains relatively strong, but traders are cautious, anticipating a potential pressure on corporate profits.
The new administration led by President Donald Trump has proposed cost-cutting measures and strategies aimed at strengthening the dollar, but these measures could pose a near-term challenge for risk assets. For example, a Reuters report flagged the possibility of eliminating a $7,500 tax credit for electric car buyers, which sent Tesla shares down nearly 5% on November 14.
In a similar vein, the recent appointment of Elon Musk and Vivek Ramaswamy to lead a new government agency aimed at streamlining bureaucracy and restructuring federal agencies will likely result in some job losses and less money available for investment from both individuals and businesses. . These dynamics are likely to impact stock markets and could have ramifications for other sectors, including housing, commodities, and Bitcoin.
US government spending (left) and Bitcoin/USD (right, log). Source: TradingView
relevant: Pennsylvania Lawmaker Submits ‘Strategic Bitcoin Reserves’ Bill
US Fiscal Policy and How It Affects Bitcoin Demand
One of Bitcoin’s primary roles is as an alternative reserve asset, providing a hedge against currency declines as governments expand spending. If the U.S. government successfully limits spending growth, demand for Bitcoin as an inflation hedge could decline as investors see less risk in holding U.S. dollars.
However, given its appeal as a censorship-resistant and transparent asset, it is unclear whether investors will actually lose interest in Bitcoin’s scarcity value. Unlike gold, stocks, or real estate, Bitcoin has an extremely predictable issuance schedule, allowing it to support demand without direct competition from the U.S. dollar, especially in the early stages of adoption.
Bitcoin’s recent intraday moves were in line with stock market performance, reflecting concerns about persistently high inflation. Nonetheless, on a broader scale, U.S. fiscal problems are likely to remain, as recession risks preclude meaningful cuts in government spending.
Ultimately, Bitcoin’s trajectory toward $100,000 and above could withstand temporary pressure from short-term investor concerns about inflation.
This article is written for general information purposes and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.