When inflation rises, purchasing power of fiat currency falls. Investors seek stores of value: gold, real estate, and increasingly, Bitcoin. High inflation makes Bitcoin's fixed supply (21M cap) more attractive relative to a central bank's unlimited printing. Inflation thesis is why Bitcoin hit $100K in past cycles.
Bitcoin generates no cash flow (no yield). Its value comes from future resale. When interest rates rise, the discount rate applied to future cash flows increases, making future coins worth less today. Plus, high rates make bonds attractive again (4% risk-free), making speculative assets less desirable.
Soft CPI (3.4%)? Markets interpret as: Inflation controlled, Fed doesn't need to raise rates, Bitcoin rallies on 'mission accomplished' narrative. Hot CPI (3.5%+)? Markets interpret as: Inflation sticky, Fed forced to raise rates in September, Bitcoin sells off on rising discount rates BUT rallies later as inflation hedge thesis strengthens.
What matters for Bitcoin is REAL interest rates (nominal rate minus inflation). Real rates were negative (-1 to -2%) in 2021, making Bitcoin attractive. Today, real rates are near zero. If inflation stays high and rates stay low, Bitcoin benefits. If rates rise faster than inflation, Bitcoin struggles short-term.
Track the '10-year breakeven inflation rate' (market's inflation expectation). If CPI rises but breakeven rates don't move, Bitcoin likely rallies (inflation priced in, no rate hike). If CPI rises and breakeven rates spike, Bitcoin likely falls initially (rate-hike shock). Real rates are the real (pun intended) driver of Bitcoin valuations.
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