What every Bitcoiner warns against happened today: Federal Reserve Chairman Jerome Powell said the U.S. monetary authority will let inflation shoot above its 2% target to privilege the labor market.
The obvious argument to make is that “this is good for Bitcoin.” It’s a tired meme, but right now it seems to be especially appropriate. And sure enough, Bitcoin jumped 2% after Powell’s speech to ~$11,550. Traditional markets also reacted, with the S&P 500 rallying to new highs, while yields on longer-maturity U.S. bonds climbed.
But while markets are still rallying on the unexpected policy shift, Bitcoin quickly lost most of its gains, a sign the news was already incorporated in the price. The fact that the Fed can and will make the money printer go brrrr even faster isn’t surprising to the crypto market and only deserved a knee-jerk reaction.
This is good for crypto
Still, Powell’s statements point to a trend that should support cryptocurrencies in the long term.
Faster inflation means there is more money in the economy to buy the same amount of goods, increasing consumer prices, and eroding the currency’s value. When price increases in the U.S. climb over 2%, the Fed hikes rates to incentivize the market to stash some of the money in savings. But now Powell and 11 other policymakers decided behind closed doors the world’s most powerful central bank will change its policy; it won’t act when this happens and will just let inflation run higher.
Here’s what’s troubling about the statement:
It’s a reminder that a small group of people has absolute power over the direction of fiat currency, in this case, the world’s reserve currency.
The Federal Reserve has the dual mandate to protect the labor market and to keep consumer prices at bay. The problem is that two goals are often opposed and in a world that’s increasingly leaning towards populism, central banks will choose to privilege the job market over keeping inflation targets. This means the currency loses.
The statement is good for Bitcoin because it may prompt people to hold the largest cryptocurrency after realizing the following:
Bitcoin has a predictable issuance schedule and a cap on the coins that will ever be issued, set at 21 million.
Monetary policy follows the rules coded on the Bitcoin protocol, and can’t be changed by a small group of people calling the shots behind closed doors. Any changes are made by broad consensus.
The price of bitcoin will be volatile because of free-market forces, but it won’t be devalued because a centralized entity decided more coins will start to flood the market.
Decentralized finance is about an alternative infrastructure for money, that’s based on global, distributed, transparent, and open networks. Ethereum is the layer for many of the more complex financial applications, but let’s not forget Bitcoin’s role in this space: it’s crypto’s hard money. DeFi’s digital gold. An alternative to financial systems that are often reckless, populist and unpredictable, sometimes corrupt, and always centralized and opaque.
[This story was written and edited by our friends at The Defiant, and also appeared in its daily email. The content platform focuses on decentralized finance and the open economy and is sharing stories we think will interest our readers. You can subscribe to it here.]