Bitcoin is an asset with no cash flows, no interest payments, and no fundamentals. That means explanations for short-term volatility are often little more than guesses. However, this time, there is an easy explanation for the volatility of the recent few weeks. In general, Bitcoin and gold tend to experience higher dollar prices when the yield on the dollar declines. That makes sense. When you get paid more for holding dollars, the dollar becomes relatively more attractive vs assets that have no yield. When interest rates on the dollar decline, you’re not giving up as much income to hold assets like Bitcoin and gold which have a much lower inflation rate. (I’m using the proper definition of inflation which is an increase in supply.)
The reason that relationship isn’t always the same is because when the dollar is experiencing higher inflation (a reduction in purchasing power), that makes Bitcoin and gold more attractive and also leads the Fed to raise rates. At times, it can be complicated. This time, it’s clearer.
A couple of weeks ago, Bitcoin “crashed” from just under $120k to the $112k and change range. Then, President Trump started pushing harder in public for a more dovish more accommodating Federal Reserve. (As noted previously, I think this course of action is unwise and unlikely to get the President his preferred outcome of lower long-term borrowing rates.) A Fed Governor stepped down early giving President Trump the opportunity to start remaking the Fed sooner than expected. A more dovish Fed means a lower fed funds rate, and that caused Bitcoin to rise.
This price move was amplified by a lower-than-expected CPI number earlier this week leading most market observers to believe the Fed would cut 25bp (.25%) at the next meeting and some to think a 50bp (.50%) cut was a possibility. Overnight, Bitcoin rose to a new record of over $124k. That’s because the recent Japanese Government Bond auction didn’t go well leading people to believe the Bank of Japan (BOJ) needs to raise rates again. US Treasury Secretary, Bessent, said so in public which means that the US government is encouraging Japan to raise rates while the White House is trying to get the Federal Reserve to lower rates. This would strengthen the yen against the dollar. Again, a weaker dollar means higher dollar prices for Bitcoin.
From an overnight high of above $124k, Bitcoin has “crashed” again over the past few hours to the current $118k+ range. That’s a big move in just a short time. The reason for that was a much higher-than-expected Producer Price Index (PPI) report. The PPI came in at a scorching 3.3% vs expectations of 2.5%. The Core PPI was 3.7% vs expectations of 2.9%. Remember that producer price inflation hits first and later leads to consumer price inflation which we’ll likely see in a future CPI. This isn’t the tariff Armageddon predicted by fiat economists, but it’s looking like validation for the ones saying we’d see an increase in the CPI in a few months. This hot PPI print is likely to make the Fed concerned about cutting the fed funds rate just ahead of a likely increase in the CPI and makes the expected Fed cut at the next meeting unlikely. This expectation of a higher fed funds rate makes the dollar more attractive vs non-yield-bearing assets. That’s why Bitcoin’s dollar price fell so hard just before today’s market open in NY.
Does any of this matter? In my opinion, no. While it’s interesting and educational to explain these short-term moves, my thesis on Bitcoin is long-term. I continue to believe that Congressional overspending by both parties will continue to debase the dollar. All Presidents want an accommodating Fed and President Trump’s behavior is unusual only in that he has these conversations at high volume in public instead of behind closed doors as is the norm.
Expect the purchasing power of your dollars to continue to fall. In addition, we’re seeing constant increases in institutional adoption of Bitcoin. It was only last year that the SEC approved Bitcoin ETFs making it possible for traditional asset managers to hold it for clients in standard brokerage accounts. This year marks the beginning of more pension funds making allocations to Bitcoin. Those trends are likely to continue even as the issuance schedule of the apex cryptocurrency continues to decline. More demand is coming for decreasing supply. It’s the price that will adjust. I intend to hodl onwards.
IR@DeepKnowledgeInvesting.com if you have any questions.
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