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How Much Do Dollar and Euro Inflation Impact Bitcoin’s Price?

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How Much Do Dollar and Euro Inflation Impact Bitcoin's Price?

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Bitcoin’s price is primarily measured relative to fiat currencies like the USD, EUR, JPY, KRW, and formerly the CNY before China banned yuan to Bitcoin trading in September 2017. In the English speaking world, the US dollar (USD) and the Euro (EUR) are the primary fiat currencies. Both are subject to constant inflation due to increasing money supply from money printing by their respective central banks. This article explores just how much of an influence their inflation has, if any, on Bitcoin’s price.

Assuming Bitcoin’s value stays constant – a bad assumption since it is extremely volatile – to illustrate a concept, if the USD and EUR decrease in value due to inflation, then Bitcoin’s price will increase. Therefore, fiat inflation would cause an increase in Bitcoin’s price long term.

Generally, inflation is measured with the consumer price index (CPI), which measures the cost of a market basket of consumer goods like food and gas, and shows the change in the amount of fiat it takes to purchase the basket over time. There is a correlation between the increase in money supply from money printing and the increase in CPI in the United States.

CPI data for the United States started to be recorded in 1913, when a market basket of goods cost USD 9.80. As of June 2018, this same market basket now costs USD 252, which corresponds to a 2,470% increase in CPI since 1913. On average, this suggests 23.5% inflation per year relative to the value of the USD in 1913, and most of this inflation has occurred after 1970.

Since the launch of Bitcoin, the USD CPI has risen from 211 to 252, corresponding to approximately 20% inflation. Therefore, USD inflation should cause Bitcoin’s price relative to USD to rise by 2-3% per year. This is practically undetectable since Bitcoin’s price is extremely volatile, but perhaps once the Bitcoin market matures this will become a more significant factor.

The EUR CPI has increased from 90.8 in 2009 to 103.8 in May 2018, suggesting a lower EUR inflation rate of 1.5% annually since the launch of Bitcoin. Therefore, EUR inflation should cause Bitcoin’s price relative to the EUR to rise by 1-2% per year.

Caution must be used when calculating inflation with the CPI. There is controversy surrounding the CPI since the way it is calculated has been revised numerous times over the years by the government. Some believe the government is underestimating CPI to make inflation appear less than it really is, since that makes the public less likely to lash out at the government for money printing.

The United States Money Supply M0, which includes cash, coins, and assets easily convertible into cash, increased drastically during the global financial crisis that began in 2008, from less than USD 1 trillion to USD 4 trillion by 2015. This represents trillions of dollars in money printing and suggests that inflation is much higher than the official CPI numbers indicate.

The tremendous amount of fiat money printing illustrates why Bitcoin has a major advantage over fiat currencies. The total amount of Bitcoins is fixed at 21 million, so in the long run, Bitcoin will have no inflation once mining is complete. This means in the future people can save money in Bitcoin and not have to worry about losing value from money printing.

In 2018, mining will produce 657,000 Bitcoins, corresponding to a roughly 4% increase in the Bitcoin supply that can be considered Bitcoin inflation. Dollar inflation and Bitcoin inflation approximately cancel each other out, if the CPI numbers are accurate. However, if Bitcoin had a CPI, it would be decreasing drastically since Bitcoin’s price has been going up rapidly long term, so Bitcoin is actually strongly deflationary.


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