This morning, Bitcoin continues to stick at prices wildly above where it was earlier this year. Then there’s additional talk about how Bitcoin’s rally may be only starting to take off.
What drives an asset like this to double or triple its price? Or beyond?
Many analysts believe that unlike such past phenomena as the tulip mania or beanie baby hoarding, Bitcoin enthusiasm is partially based on unprecedented U.S. fiscal policy.
Today, Yashu Gola at NewsBTC suggests that bitcoin bullish sentiment may be driven by the Federal Reserve for preparing to purchase more long-term U.S. Treasury notes.
“The Wall Street Journal reported on Wednesday that investors believe that the Federal Reserve will start buying long-term US bonds after its next policy meeting in December,” Gola writes. “The divided outcome of the November 3 elections left investors thinking that the central bank would need to undertake more responsibilities to support the US economy. That is because of the rising number of coronavirus infections, coupled with the US Congress’s inability to pass the second stimulus package for months. A hung Senate further ensures that American individuals and businesses will need to wait further to receive economic aid.”
For a long time, the Fed has been buying bonds in order to lower interest rates. This helps to spur some kinds of economic activity, but it can also lead to massive inflation.
“The total supply of goods and services is essentially finite in the short term – and with more dollars chasing that finite set of products, prices go up,” writes Eric Petroff at Investopedia, describing this risk. “If inflation gets too high, then all sorts of unpleasant things happen to the economy. Therefore, the trick with interest rate manipulation is not to overdo it and inadvertently create spiraling inflation. This is easier said than done, but although this form of monetary policy is imperfect, it’s still better than no action at all.”
That’s where Bitcoin comes in. As an inflation-resistant asset, BTC is compelling in a volatile equities market, where people see the Federal Reserve being likely to throw all of its switches and do all of its last-ditch manipulations to ensure a smaller recession or depression in the coronavirus pandemic era
Then that flight to Bitcoin will spur even more of the Bitcoin rally, because it will be perceived as a specific belief in the coin’s ascension. It’s a classic triggered spiral.
The bottom line – look for big moves to come into play early next year.
