in

Inflation and Crypto – A Detailed Analysis That Everyone Should Read

Hi Y’all,

​

I wanted to update the deep dive with some more analysis and why inflation is coming

​

External analysis:

New Correlation:

[https://www.bloomberg.com/news/articles/2021-02-16/bitcoin-s-ebbing-correlations-boost-its-diversification-benefits](https://www.bloomberg.com/news/articles/2021-02-16/bitcoin-s-ebbing-correlations-boost-its-diversification-benefits)

Old Correlations:

[https://www.coindesk.com/bitcoins-price-correlation-with-sp-500-hits-record-highs](https://www.coindesk.com/bitcoins-price-correlation-with-sp-500-hits-record-highs)

[https://www.forbes.com/sites/investor/2020/05/13/bitcoin-and-stocks-correlation-reveal-a-secret/?sh=3da883d312c2](https://www.forbes.com/sites/investor/2020/05/13/bitcoin-and-stocks-correlation-reveal-a-secret/?sh=3da883d312c2)

​

My Analysis:

​

Historic S&P to BTE:

[Data from St. Luis FED](https://preview.redd.it/fuy3himt1ul61.png?width=1540&format=png&auto=webp&s=f0fb6b52347b14db5774548b8844630858d728f1)

As you can see below, for most of the recovery (March through November), the historic tie between S&P and BTC held at 84% of variance explained with a high degree of significance.

​

https://preview.redd.it/vdztzqab4ul61.png?width=505&format=png&auto=webp&s=0a6bc79a81a27e31fc9db94c5fa9ddd369187e17

Diving Deeper, when we analyze the full YTD trend line we see a strange phenomenon, that historic ~84% variance model shifts dramatically in its explained variance. Doubling standard error, and reducing the R2 from 84% to 59%. The vast majority of this happens from November to March.

​

[BTC Price to S&P Index](https://preview.redd.it/1pmluaci2ul61.png?width=1529&format=png&auto=webp&s=e3af0e1fe5f048d8f5696a2295fb1cf4fda4d349)

https://preview.redd.it/go6v4uob2ul61.png?width=527&format=png&auto=webp&s=3b044dd81e28a42389c7da6f371e70ed90e939ad

Given the historic tie between BTC and S&P, per Coinbase and Forbes, this needs to have a causality. Finding the causality, one needs to look for larger changes in the overall state of the economy and what Bitcoin means as an asset.

The macroeconomic theory Quantity of Money’s equation: MV = PY, where M is money supply, V is money velocity (how often a dollar changes hands), P is average price per good, and Y is output (or real GDP) can be rewritten as M= PY/V or money supply equals PY(Nominal GDP) / Velocity of money.

​

Historically, in the short term, prices are sticky; meaning it takes time for average price of goods to reflect a change in the overall money supply. Compounding this, the money supply only affects inflation when velocity increases.

So going back to the quantity of money equation that the Fed uses, MV=PY, the Velocity of money has been depressed by the pandemic (people have been spending less). So we’re waiting for post-Corona Inflation, where velocity returns to normal rates, putting all that money back into the economy. Prices in the short term are sticky, meaning that they are resistant to change, and that’s where we’re headed. Dollars are, in real terms, going to be worth less than previously, and by a lot.

​

So how much is a lot?

​

That’s where you need to take into account what a dollar really is, which is a (mostly) non physical unit of account that, due to our system of fractional banking, can be in many places at once. This idea of a dollar existing in multiple place has a name, and its called the money multiplier. The money multiplier is how much “digital” money is out there in proportion to the monetary base (the amount of physical dollars). You get this by dividing the amount of money held in accounts and in reserves (money that banks are required to hold as collateral)

​

Seen here:

​

[M1,M2,MB In Billions, Source: https://www.federalreserve.gov/releases/h6/current/default.htm](https://preview.redd.it/rnm04e5ylul61.png?width=815&format=png&auto=webp&s=abbde0cb408678d993bd36dad5edf252072f02ce)

So for every dollar printed, as of January 2021, 3.45 dollars are added to the money supply. Not that big of a deal if your printing a few dollars. So lets put it in perspective. How much money was printed?

Lets go back to the Fed to find out: [https://fred.stlouisfed.org/series/MANMM101USA189S#0](https://fred.stlouisfed.org/series/MANMM101USA189S#0)

​

[% Change in Money Printed by Year**](https://preview.redd.it/4odyxiwpoul61.png?width=1168&format=png&auto=webp&s=5b68517abc585b5e212e66a4a9852f2e4652f36a)

OECD, “Main Economic Indicators – complete database”, Main Economic Indicators (database),[http://dx.doi.org/10.1787/data-00052-en](http://dx.doi.org/10.1787/data-00052-en) (Accessed on 3/8/2021)

​

Digging into the data, from 2019 to 2020 you see a 34% jump in the money supply. To state that again, 34% of all money in circulation was printed within the past 12 months.

​

To put a number on it, as of January 1st, that was $1,307,858,333,333.33 that’s 1.3 trillion physical dollars, but that’s not it. To find the amount of non-physical dollars in the money supply, take that 1.3 trillion and multiply it by the money multiplier. As of January, every physical dollar introduced resulted in a sum of 3.45 physical and non physical dollars.

​

So why isnt everything 34% more expensive? The purchasing power of the dollar should be reduced because there’s less of it, right? The answer is yes, and no. This is where “sticky” short term prices come in. So long as the velocity of money stays below average due to the pandemic, inflation is at bay.

​

– BUT –

​

That’s temporary at best, macroeconomics show that in the long term, equilibrium will be met. A shift in the Monetary Supply, driven by the FED reducing interest rates for banks (allowing them to borrow for almost free), and purchasing Government bonds (with newly printed money), drives Aggregate demand up.

​

[Money Supply and Aggregate Demand](https://preview.redd.it/i46kalijsul61.png?width=418&format=png&auto=webp&s=e9497aeac5429d9403dba4a19a75d4310d5bd069)

​

Aggregate demand pushes prices up (in the long term), and increased prices (inflation, again long term). Resulting in the rebalance of prices and output to the new equilibrium.

So here we stand, the Fed has pumped money into the economy through purchasing bonds – increasing the money supply, but rather than spend the money, the average American is saving it. The Money supply = Nominal GDP/ Velocity hasn’t caught up to the Fed’s influx of cash. When it does, prices will shoot up to match the change in real purchasing power.

​

So what does that have to do with Crypto?

​

Capped cryptocurrency, unlike the USD, isn’t subject to a regulating body that needs to fund itself. There is no loss to road maintenance, no loss to paying civilian employees, no loss to purchasing land, buildings, or warships; its a much more efficient unit of account. More importantly, unlike the USD, creating more crypto costs a exponentially greater amount of resources over time. Its more akin to Gold than it is to the USD.

​

People are not willing to buy US bonds due to fears of inflation, driving the bond market to increase the yield to entice people. The former bond holders, out of fear of increased inflation are flocking to alternative assets. Crypto has benefited from this phenomenon and is set to continue to benefit.

Seen here:

​

[Data: St. Louis Fed](https://preview.redd.it/5pujdni3zul61.png?width=1539&format=png&auto=webp&s=c62250af1fbd90ca816fa1a962ecae2f74315000)

​

[BTC to Bond Yield](https://preview.redd.it/v9i9w5t7zul61.png?width=787&format=png&auto=webp&s=b88ae2ea4c1211f86f4ea4be1248b8723b946871)

We have a bumpy ride ahead, HODL.

​

TLDR –

The quantity theory states that the rate of money growth is directly proportionate to the rate of inflation. The Fisher Effect states that the rate of inflation is directly proportionate to the nominal interest rate (a .71 R value). The nominal interest rate is key because historically, bond prices have a negative correlation to nominal interest rates, meaning the higher the interest rate, the lower the bond sales, the lower the bond sales the higher the yield they need to offer.

The bond market is starting to move with Inflation, and rather than keep cash in bonds or USD, a currency that potentially lost 33% of its real value as more was printed, they flocked towards BTC and ETH; rather than slowing down, this pattern may speed up as we see the fed slow to react to inflation by reversing its stimulus policy.

The inflation that everyone is worried about is already happening, institutional investors have already begun switching to BTC over bonds. The real fun will happen when retail switches over en-mass and purchases smaller coins.

​

Bullish on (in order): ETH, BTC, DOT, & ADA

​

This is not investment advice.

​

***Edit: Thanks for the Platinum, silver, and hugz!! ***



View Reddit by Ameri-CantBeWrongView Source

Comments

Leave a Reply

Your email address will not be published. Required fields are marked *

GIPHY App Key not set. Please check settings

27 Comments

  1. Finally, someone spent time to research, using complex words to describe what is happening inside a graph so that I could read 5 words and act smart

     

    On a serious note –

    Thanks for sharing us your research, it’s really well done and objective

  2. Thanks for the analysis. It’s a good reminder that the effects of an increased money supply on inflation is not immediate and influenced by velocity.

    Equity markets as well as commodities will all tend to rise. Large holdings of cash (USD) will suffer.

    Really nothing new, but conditions are right that it could accelerate in the immediate future.

  3. Until the Fed reacts and starts reducing its balance sheet. Which it will do if inflation significantly cracks its targets. Why do you think the market is twitchy right now? Not because of inflation per se, but because higher inflation might cause the fed to act earlier or more aggressively than expected. Nice looking analysis, but utterly one-sided and designed to fit a narrative. And the rigid view of the money supply has been out the window for some time: which is why M1 isn’t as big a deal now, when a minor move to in it used to send markets into a frenzy.

  4. Man, my attention span has really gone to shit. When I was a teen, I would have enjoyed reading this whole thing and absorbed all the info. Now as someone in his mid 30’s, my eyes just gloss over and I scroll to the comments. What have I become?

  5. This is really informative. Thanks, man. I don’t have a lot of financial education/experience and I’m finally just getting interested in it and learning as much as I can. It’s posts like this that really teach me something new and valuable.

  6. So what happens when the velocity of money increases above the average as states across the country begin to open? Will this cause the effects of inflation to become more prominent? Will this cause a market correction, or will the price of crypto continue to rise? Thanks for the write-up, dataman!

  7. Love the post! I’ll play devils advocate a little and say that modern monetary theory would argue that inflation only occurs when the money made cannot be absorbed by different sectors of the economy. That is to say, there is a theoretical basis to argue that the inflation will not be as bad as presented here. Time will tell!

  8. I just read your post and every comment. I’m not sure I understand half of it but holy shit I feel smarter. I think I’m going to follow you like the crowd that followed Forrest Gump when he went on his run. Will others join me?

    In all seriousness this is the best post I’ve seen in a long time. And if you did this post to pump your ETH, BTC, DOT and ADA bags then well done!!!!

  9. Awesome post! Also, agree the dollar is in for a reckoning

    Question: How does the distribution of the money supply play into this? If a majority of the created money finds its way into the top 1%, shouldn’t this have a lessened effect on prices?

    I understand this wealth inequality has its own problems, but I would imagine it changes the inflation potential.

  10. Great analysis, I usually roll my eyes when people start shouting about inflation but you make a very good case as to why things are different this time. That M1 chart is scary.

    Also, bullish.

  11. Well, thank you sir. I don’t agree over the ETH vs. BTC part but you’ve done a nice statistical analysis to back up your findings so it’s hard to argue with that.

    ​

    Good job and thank you again.

  12. Out of curiosity, why are you more bullish on DOT than ADA? I’m still in the process of understanding both (so I could be wrong), but ADA seems better positioned to benefit from ETH’s current high gas fees and potential migration of dApps that can’t function on ETH right now.

Loading…

0

What do you think?

100% Remote Full Stack Software Engineer

Just a friendly reminder 😉