A key thesis for Bitcoin’s long-term bull market has just taken a hit

A popular narrative argues that the Federal Reserve’s massive stimulus programs, launched to counter a coronavirus-induced recession, could hyperinflate the economy and fuel a major recovery in bitcoin.

However, that bullish theory, which suggests that the cryptocurrency would be seen as a hedging asset in dire economic times, has taken a heavy hit with recent data from the US central bank.

The data suggests that inflation is likely to remain absent for some time and, in fact, the probability that the US economy will fall into deflation is increasing.

There is now a 78.6% chance of deflationary pressure for the US, the highest since 2008, according to the St. Louis Fed deflation risk monitor. As Reuters financial data correspondent Ritvik Carvalho tweeted, the Fed-favored inflation measure (bottom right), basic personal consumption spending, has also dropped to an eight-year low of 1%.

Inflation refers to a sustained increase in the general level of prices of goods and services. In contrast, deflation is characterized by a general decline in the prices of goods and services, and is often accompanied by an increase in unemployment.

Since the coronavirus crisis began in early March, the Fed has injected an unprecedented amount of liquidity into the system to help the economy absorb crises from the virus outbreak and ensure the stability of the financial market. Its balance sheet size has expanded by more than $ 3 trillion in the last 3.5 months.

Crypto analysts are convinced that massive injections of money would drive inflation and bode well for Bitcoin. That is due in part to the slowing down of the cryptocurrency’s supply, which is reduced by 50% every four years through a process called “halving.”

Also read: Bitcoin’s halving has nothing to do with quantitative adjustment

“As we have closely monitored the market in the wake of recent economic policy decisions, we have seen that the crypto asset class is not only resilient, but interest is increasing as the monetary stimulus has caused investors to look at $ BTC as a potential hedge against inflation, ”Grayscale Investments, one of the leading digital asset management companies, recently tweeted. (Grayscale is a unit of CoinDesk’s parent digital currency group.)

Legendary fund manager Paul Tudor Jones also recently revealed a small bitcoin position to help protect against rising inflation.

But with the Fed’s data and market-based measures of long-term inflation expectations that also suggest a low probability of a rise in inflation in the next five years, the odds that Bitcoin will witness a market Inflation-driven bullish appear weak.

So if the US is indeed facing deflation, what does it mean for bitcoin?

Some observers suggest that the cryptocurrency would appreciate in a deflationary environment, if its adoption as a medium of exchange increases, as discussed in April. This is because deflation increases the purchasing power of the monetary unit. For this reason, the US dollar tends to appreciate during deflationary fighting.

There is also evidence that institutional participation in the bitcoin market is increasing. As a result, part of the growing money supply may reach the bitcoin market. In that case, the cryptocurrency could rise in the long term despite low inflation or deflation.

See also: Why global deflation may not be bad news for Bitcoin?

In the short term, the scenario for bitcoin seems somewhat uncertain. At press time, bitcoin is changing hands just over $ 9,200, according to the CoinDesk Bitcoin Price Index. The cryptocurrency has spent most of the past two months trading in a narrow range and may be facing losses after failing several times recently to overcome the major $ 10,000 hurdle.