After reaching a peak above $65,000 in mid-April, the price of bitcoin has since dropped by more than 40%. The long-term bull trend in the leading cryptocurrency, however, cannot be stopped by it, especially given how the world’s markets are currently dealing with weakening national currencies and the potential for a meltdown in the commodity markets.
According to Mike McGlone, a senior commodity strategist at Bloomberg Intelligence, diversifying into assets that may be used as a store of value is a smart move to guard against bleak currency and commodity market outlooks.
Money printer jams
McGlone’s bullish analogy made use of a recent surge in capital infused into the economies of the United States and the Eurozone. The U.S. Money Supply M2, which counts the cash and bank deposits (M1) as well as near money, increased from $15.384 trillion on February 10, 2020, to $20.256 trillion on May 3, 2021.
The U.S. economy received an excess of liquidity, which made the dollar less strong relative to the major world currencies. Due to this, the U.S. dollar index (DXY) decreased by over 11.22% from its mid-March 2020 high of 101.947 to 90.5 as of June 16.
The Eurozone Money Supply M2, which measures the amount of money in circulation inside the European Union, increased from €5.6 trillion in February 2020 to over €14 trillion in March 2021.
Jordan Rochester, a Group-of-10 foreign exchange analyst at Nomura International, noted that the European government’s functional response to the coronavirus pandemic drifted capital out of the U.S. markets to enter the eurozone economy, explaining why the euro strengthened against the U.S. dollar despite its oversupplied status.
However, Bitcoin‘s price surged at breakneck speeds versus the dollar and the euro on assurances that it would protect investors from rising inflation. The BTC/USD exchange rate increased significantly from $3,858 in March 2020 to just over $40,000 in June 2021, while the BTC/EUR exchange rate increased significantly from €3,363 to around €32,000 throughout the same period.
In May 2021, the inflation rate in the United States reached 5%, the highest level since 1992, according to recent consumer price index statistics. The headline rate of price growth in Europe exceeded the European Central Bank’s (ECB) aim and came in at 2%.
As the two-day Federal Open Market Committee policy meeting comes to an end on Wednesday, Federal Reserve officials also anticipate reducing inflationary pressure. The increased CPI in April and May are just temporary, according to earlier statements from the U.S. central bank.
A Future Commodity Shock?
Investors that considered hedging assets like Bitcoin to be dangerous opted to maintain their hedges in somewhat less volatile market segments, such as commodities. As investors sought safe havens from declining currencies, copper, the macroeconomic health indicator, rose 67%. Some other metals, including aluminum and zinc, also reported sharp increases.
China has, however, recently devised a strategy to control the surging commodity prices. On Wednesday, the National Food and Strategic Reserves Administration says that it would enhance the supply of metals, such as copper, aluminum, and zinc, to make them more readily available to producers.
McGlone suggested that a potential drop in commodity prices would also portend excellent investment opportunities in the gold and Bitcoin markets.
