2022 Global Inflationary Pressures Drive Up Bitcoin Demand

The United States, Eurozone, United Kingdom among many other economies are experiencing record levels of increased inflation resulting from numerable factors including the massive quantitative easing programs they have been running since the onset of the covid-19 pandemic.

Bitcoin has gained over 13% in the last one month and inflationary pressures seem to have spiked this demand. In economies that are currently experiencing runaway inflation such as Turkey, Russia, Brazil, and Argentina, crypto adoption has significantly increased, according to data from blockchain data platform Chainalysis.

Global financial markets investors are notoriously known for reacting to trends in oil prices and central bank policies. This week, US crude oil has rallied over 23% on concerns of supply-side pressure resulting from the Russia-Ukraine war and the resulting sanctions. Investors are expected to react to this rise. They could react by hedging their positions in safe haven assets such as Gold and Bitcoin or by buying equities that are benefitting from the oil rally.

Last week, Russia’s invasion of Ukraine led the Ruble to a 30% drop against the US dollar. With January inflation reported at 9.5%, the Central Bank of Russia hiked the key lending rate from 9.5% to 20% to control the runaway inflation. As a result, Russia’s Bitcoin trading activity rose to a 9-month high, according to Blockchain news site, CoinDesk.

The global oil price rally began in April 2020 and is still continuing. In 2021, both US crude oil and Brent oil rallied over 50%. This has accelerated in 2022 with both markets rising a further 47% year-to-date. I expect the higher oil prices to lead to a hike in product prices leading to higher inflation globally.

Even though major central banks have slammed brakes on quantitative easing programs and are currently hiking interest rates, cash savings have already been hurt by the high rate of inflation and savers are looking for alternative ways of storing their wealth. Based on gold price performance since the beginning of the year, I can say that gold is winning the inflation hedge war against Bitcoin, so far.

However, given the sanctions and censorship measures being implemented today to limit transactions with Russians and Ukrainians, the retail sector is finding it easier to use Bitcoin compared to gold and fiat currencies. This additional Bitcoin utility has enabled the Ukrainian government to fundraise its military budget using Bitcoin and other cryptocurrency donations.

With Nigeria’s rate of inflation standing at 15.6% in January 2022, traders looking to make international remittances have turned to bitcoin since the Naira’s exchange rate with the US dollar is continually becoming expensive. According to a recent article by Reuters, Nigerian traders are able to escape the effects of currency devaluation by using Bitcoin to store their value.

Russia and Ukraine are among the top 5 wheat, sunflower, and corn exporters in the world. These products are largely exported to North Africa and the Middle East. A disruption in their supply could cause food shortage, higher food prices and consequently, inflation.

To protect household budgets from the effect of this inflation, there is a strong likelihood that retail traders will stockpile bitcoin as it has proven to be a reliable store of value over the last decade, despite being highly volatile. The adoption of Bitcoin in Middle East countries experiencing high inflation and unstable autocracies has already significantly accelerated, according to Blockchain news site, CoinDesk.

It is prudent to note that bitcoin has been trading as an alternative asset showing positive correlation with equities such as US technology stocks before the Russian invasion of Ukraine. Bitcoin’s use as an inflation hedge is yet to mature as its volatility erodes consistency of value. With wider adoption, Bitcoin could eventually become the de facto inflation hedge according to Robert Breedlove, founder and CEO of Parallax Digital.

Disclosure: I own bitcoin and other cryptocurrencies.