Why Bitcoin Has Been Highly Correlated With Fiat

Bitcoin is a conversation with fiat.

It isn’t independent. It’s contextual. It’s relational. Bitcoin is contextualized by the existence of fiat, and hopefully, fiat becomes contextualized by Bitcoin.

It’s like hot and cold, light and dark. Bitcoin is the absence of monetary intervention, while fiat is money optimized for and defined by monetary intervention.

Steven Lubka, a CoinDesk columnist, leads Swan Private, Swan Bitcoin’s concierge service for high-net worth investors. This article is part of CoinDesk’s “Trading Week.”

Bitcoin, without fiat, is just money. Fiat, without bitcoin, is just money.

Starting with this lens we can discuss why bitcoin has been correlated to the unique macroeconomic environment we are in which has been decidedly negative for practically all assets.

You can hear it when people talk about bitcoin:

“Wasn’t bitcoin supposed to be independent of traditional markets?”

“Wasn’t bitcoin supposed to be an inflation hedge?”

For an asset which is supposed to provide an alternative to contemporary finance, why has bitcoin been so correlated to traditional markets and central bank policies?

If bitcoin is anything, it’s an alternative to fiat. Call it a hedge, call it an escape hatch, call it whatever you want. It’s something you can own in case the current iteration of the dominant money system fails or becomes dysfunctional (or already has).

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The common thread is any discussion of “inflation hedges” is only relevant insofar as we use the actual and original definition of inflation – monetary expansion. The modern semantic switch to inflation representing consumer goods prices doesn’t help us here.

Gold and bitcoin are both inflation hedges in this sense. They appreciate when the fiat money supply is expanded and they decline when that money supply contracts.

Consumer good price increases due to decades of malinvestment, under-investment in commodities, supply chain disruptions, and deglobalization do not constitute a boon for fixed monetary, assets that should appreciate in value as economic growth increases.

Bitcoin’s price performance in 2022 is not evidence of a failure for bitcoin or even a failure of narratives around Bitcoin when properly contextualized. It is solely evidence of rapid destruction of liquidity and profound geopolitical disruptions.

The good news for bitcoin investors is that a prolonged contraction of economic growth and of credit will eventually render the system totally insolvent. While this would be devastating, our esteemed central planners will eventually stop short of this and engage in a jubilee of monetary and fiscal support.

While anything is possible, the skillful deleveraging and austerities that would be involved in avoiding the inevitable monetary debasement appear far beyond the means or appetite of the current political apparatus. Therefore, the base case is more monetary expansion, and more debasement of fiat.

See also: The More Energy Bitcoin Uses, the Better