Inflation in Europe is reaching a worrying new moment for Bitcoin

The year 2022 was marked by skyrocketing inflation around the world and central banks responded by raising interest rates. It is now clear that inflation in the eurozone is far from over, because the so-called core inflation reached a new high of 5.6 percent yesterday. The big question, of course, is what this means for Bitcoin.

Eurozone core inflation.

What is Core Inflation?

Core inflation is basically the CPI minus food and energy prices. Central banks prefer to look at this inflation indicator because food and energy can be quite volatile. By removing these two from the inflation meter, they say, you get a much more reliable picture of real inflation.

Of course, the central bank does not deny that food and energy are vital parts of life, but merely points out that this is a better indicator of inflation for policy making.

The normal consumer price index fell from January to February from 8.6 to 8.5 percent. But core inflation rose from 5.3% to 5.6%. This will come as a shock to European Central Bank (ECB) policymakers, as they still expected inflation to stabilize after months of rising interest rates.

Food for the falcons

If you ask Marco Vailati (head of research and investment at Cassa Lombarda), those numbers are good enough for them. hawks. We speak of a hawk or a hawk when, for example, we are dealing with a central banker who believes that interest rates should rise further to control inflation or cool down the economy.

“This core inflation is food for hawks. […] This will strengthen the case for tighter central bank policy,” Vailati told Reuters. Most importantly, if Vailati has his way, this inflation reading means we can expect more rate hikes from the ECB, which is bad news for Bitcoin.

What does this mean for Bitcoin?

High interest rates are generally not good for risky assets such as bitcoin, other cryptocurrencies and stocks. Because due to the high interest rate, you can get a relatively safe return by buying government bonds. The yield on US government bonds is currently just below 5%. This way you can put your money aside and you are assured of an almost guaranteed return of 5% per year.

There is now much more risk in Bitcoin. You can achieve returns of more than 5% with Bitcoin, but the macroeconomic conditions are very uncertain at the moment. In 2022, interest rate hikes by central banks already put pressure on prices and now that inflation has not yet disappeared, there is a good chance that new interest rate hikes are planned.

In that regard, it could be a tough year for Bitcoin. In addition, a possible rate increase can also cause problems for the economy. These problems can eventually lead to a recession, and recessions are generally not part of risky assets. On the other hand, Bitcoin is quietly moving towards the next halving, scheduled for March 2024.

With a Bitcoin halving, the reward for miners for producing a new block for the blockchain is halved. Now they get 6.25 bitcoins per block and from March 2024 that will be 3.125 bitcoins per block. This cuts Bitcoin’s inflation rate in half and has led to spectacular price increases in the past.

Source: Btc Direct

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