Bitcoin price was slashed in half during the month of May, leaving today as the last day for bulls to make a stand and undo the worst monthly on record.
Even if the blood stain is left behind on the price chart for good, that doesn’t mean bulls still can’t pull off an upset and push prices higher. Here are five signs that Bitcoin price has bottomed out, or will be soon.
The Signals Showing The Bitcoin Bottom Is Near
Just as extreme bullish sentiment and exuberance around mid-April was the local top of the 2021 rally so far, the current level could also act as the bottom now that sentiment has shift to the polar opposite.
Contrarian investors and traders suggest buying the fear or blood in the streets, but that’s still not the reason to think the bottom is in.
Rather, technicals on nearly all timeframes point to a reversal in the making. The first ever cryptocurrency is forming a bullish divergence (above) while at daily support. The bounce happened once the Relative Strength Index hit oversold levels.
The daily LMACD is also turning upward, showing that bulls are attempting to regain momentum on daily timeframes after a month of mayhem.
Moving up to a higher timeframe, Bitcoin price has also bounced at a rising trendline of RSI support on the three-day chart (below).
But Wait, There’s More Reasons To Be Bullish On BTC
If that’s not enough to believe there’s a low-timeframe reversal in the making, on higher timeframes there’s still many more reasons to be bullish.
The rarely-looked-at two-week timeframe shows that Bitcoin fell to the middle-SMA on the Bollinger Bands. During the last bull market, the line was never lost. In fact, touching it resulted in the finally impulse upward.
The recent push down also caused Bitcoin’s most profitable buy signal to indicate “capitulation” in BTC miners. Past bull markets saw more than 8,000% and 3,500% after the last buy signal appeared per cycle.
Nearly every time the signal appears, more upside is on the way. So why would this time be any different?
With so many signals stacking up, chances that the cryptocurrency is near the bottom are becoming more likely. Drawdowns post buy signal are still common, however, the potential reward has historically always outweighed the risk in terms of ROI versus loss.
On Sunday, May 23, Bitcoin (BTC) and the overall crypto market tanked following China’s crackdown on Bitcoin miners and traders. Well, owing to new regulatory policies, a lot of Chinese miners have considered shifting their base to Europe or North America.
Seeing a major opportunity here, business tycoon Elon Musk has jumped in while recently tweeting that he’s been talking to a lot of miners in North America for tapping into the renewable energy use for Bitcoin mining.
Recently, Elon Musk has been much vocal about the high energy usage associated with Bitcoin mining and transactions. Even Tesla decided to drop Bitcoin payments setting up the crypto market in a frenzy. However, it looks like Musk sees a great opportunity here in the ‘crypto and renewables’ market.
MicroStrategy CEO Michael Saylor took the lead in hosting the meeting between Musk and North American Bitcoin miners. Saylor tweeted:
“Yesterday I was pleased to host a meeting between @elonmusk & the leading Bitcoin miners in North America. The miners have agreed to form the Bitcoin Mining Council to promote energy usage transparency & accelerate sustainability initiatives worldwide”.
Bitcoin Electronic Money (Image: MaxPixel)
Standardizing Energy Reporting for Bitcoin Mining
Since the Bitcoin mining energy consumption is the new heated debate in the market, industry players are putting efforts to bring a solution to it. As Michael Saylor, executives from some of the biggest Bitcoin mining associations joined the meeting with Musk.
This includes big names like Marathon Digital Holdings, Riot Blockchain, Argo Blockchain, Core Scientific, Hive Blockchain, Hut 8 Mining, and others. All these players decided to form an organization to standardize energy reporting associated with crypto mining.
Besides, these players will work together to pursue the industry ESG goals along with making efforts to educate the crypto-mining marketplace.
North American miners have the biggest opportunity hereafter China’s crackdown on Bitcoin miners recently. Will North America become the new dominant player to control a majority of the Bitcoin hashrate?
Cryptocurrency exchange outflows have over the last few days, after the prices of most cryptocurrencies plunged in a market crash that saw the total market capitalization of the space drop from $2.2 trillion to $1.5 trillion. On-chain analyst Willy Woo has pointed out user growth on the network suggests the bull market hasn’t been affected.
Data shared by the analyst revealed user growth on the BTC network has surged as “no-coiners” were taking advantage of the price drop to buy BTC. Per his words, the bull market is “very much intact.”
He added that BTC’s user count has “roughly doubled every year since inception a dozen years ago,” and the peak for this year is expected to “end at levels MUCH higher than the 2017 peak.” This, he implied, suggests the market is “just warming up.”
Seemingly suggesting a recovery is coming, data from blockchain analytics firm Glassnode shows massive bitcoin outflows were seen as prices started dropping and kept on increasing steadily. The shared data seemingly suggests that some HODLers bought the dip, and moved the funds to wallets under their control to hold for a longer period.
The recent cryptocurrency market crash started shortly after Tesla CEO Elon Musk revealed in an announcement that the electric car maker would no longer accept bitcoin payments over environmental concerns.
The market was seemingly over-leveraged, as prices dropped triggered a wave of liquidations that put further pressure on prices. As the market turmoil was unfolding three major payment associations in China – the National Internet Finance Association of China, the China Banking Association, and the Payment and Clearing Association of China – reaffirmed their commitment to upholding regulations from 2017 preventing financial institutions from dealing with cryptoassets.
Over the last seven days, the price of bitcoin plunged from around $45,000 to a $32,000 low before it started recovering. CryptoCompare data shows the flagship cryptocurrency is now trading at $37,600 and is up 11% over the last 24-hour period.
Glassnode’s data shows that the last time exchange outflows for the cryptocurrency surged was in March of last year, when bitcoin’s price plunged by nearly 50% in 24 hours after most major U.S. equity indices entered bear market territory and the World Health Organization declared the COVID-19 breakout a pandemic.
The prices on the Bitcoin chart reflect a struggling Bitcoin, one that has been at the mercy of the decision of a large institution: Tesla. Bitcoin seemed to be gearing up for a retest at $60,000 before the bear market pulled the price back to as low as $35,000 as of yesterday.
Although at press time, Bitcoin is correcting losses, it has done little to convince skeptics that the asset is in a safe zone. While this is the part of the market that is most visible to onlookers and even some market participants, new on-chain data presents us with many reasons why there’s more than meets the eyes.
The panic selling is massive, but long-term Bitcoin holders are committed
Last week, the market recorded liquidations of over $2 billion long positions. This was of course reflected in the 30% drop in Bitcoin’s price. However, a look at on-chain data shows that there’s more to the story than what the charts reflect.
Yes, there is a major market selloff, but these sales are being made by impressionable new entrants who are easily influenced by the FUD. As newbies continue to sell and sustain losses, old hands remain firm, ignoring the bear trend, which they know to be temporary. As Glassnode writes in its weekly on-chain report:
“Newer market entrants have panic sold and realised significant losses on their coins. A total of 1.1M addresses have spent all coins they held during this correction, again providing evidence that panic selling is currently underway.”
Has Bitcoin hit the top?
Tales have it that Bitcoin has reached the top and that the bull run has run its course. But it might be too quick to close the curtains on the bullish cycle as on-chain data yet again reveals why the market, in comparison to historical data, still has a long way to go before the bulls call it a day. Glassnode notes that although last week saw Bitcoin make a sharp correction, it is nothing new when we flip the pages back to 2017.
“The current correction is now over 28% below the $63.6k ATH set on 13-April. This is the deepest correction of the current bull market, however it is consistent with five major pull-backs during the 2017 bull.” — Glassnode.
While the 2017 bull market ran for a full year, the 2021 bull market has only been on for about 200 days, meaning that Bitcoin still potentially has 165 days (which is over 5 more months) to move in green.
It’s been a difficult few days for Bitcoin, the world’s largest cryptocurrency, with BTC falling from the $57,000-level on the 11th to $39,300 at press time.
What precipitated such a correction? Well, the overwhelming factor in everyone’s mind can be summed up by one man – Elon Musk. While DOGE remains his favorite, Bitcoin seems to have lost his favor, with Tesla announcing the suspension of Bitcoin payments recently. Understandably, BTC dropped on the charts on the back of the same. However, Musk wasn’t done yet.
A few days later, the exec seemingly implied that Tesla has sold or might sell all its BTC holdings. While Musk was quick to clarify later that the company has not sold any of its Bitcoin, the damage was already done.
Needless to say, everyone’s mad at Musk. However, what the aforementioned corrections also proved was that while developments like these have a significant short-term impact on the price performance of cryptos, the long-term bull market structure remains intact. This was the finding made by William Clemente III in a recent blog post.
Most commentaries on the impact of Musk’s tweet focused on the price charts and the fact that exchanges saw a sharp hike in inbound transfers (With transfers onto exchanges signaling assumed to be preceding a selling action most of the time). However, that’s surface information. What about the long-term? Has BTC’s bull run finally come to a halt, or will it consolidate before climbing once again?
According to the aforementioned report, it might just be the latter, with some pretty significant on-chain metrics pointing to the same as well.
Coin Electronic Money Currency Money Bitcoin
Consider this – The funding rates, by and large, “haven’t gone negative in aggregate,” despite the fact that they did fall below zero on the likes of Kraken, FTX, and OKEx. According to the analyst,
“Funding rates have gone negative and marked the local bottom of every correction over the last few months.”
While not in the negative zone, press time funding rates do suggest that a bottom might finally be in. Ergo, this might just be an opportunity to buy.
The SOPR is worth looking at as well. At the time of writing, the short-term holder SOPR had fallen deep into the oversold zone, with the same dipping to levels unseen this bull run. What this finding seemed to suggest was that this might be the biggest reset of the entire bull run so far.
The latest corrections also shared a lot of similarities with the corrections back in September 2017. At the time, these corrections were followed by Bitcoin climbing to an ATH of just under $20,000. Hence, there is an argument to be made for the prediction that BTC might only go north from here onwards.
What’s more, according to the analyst, Bitcoin’s weekly RSI is now approaching a key trendline that “served as support and market a reversal for the two largest corrections of the 2017 bull run.” Last week’s price candle was also found to be sitting close to the cryptocurrency’s 21-week moving average, a level that has long served as support. Therefore, a reversal can be expected soon as well.
So yes, Bitcoin’s bull market remains intact and no, this isn’t going to be the 90% price crash some expected it to be. Did Musk’s tweets have an impact? Yes. But, the fact that it did shouldn’t even come as a surprise. After all, Bitcoin and the larger cryptocurrency market were happy to move north on the back of the Tesla CEO’s positive tweets. It’s only fair that BTC would move in the opposite direction on the back of adversarial news too.
Bitcoin isn’t and should not be an instrument of Elon Musk’s shitposting tirades. And the fact that despite its long-term strength Bitcoin’s short-term movement was dictated by the whims of one man is “embarrassing.”
Arca’s Jeff Dorman put it best when he claimed that the bulk of the media had a choice to make – “to stick with the tried and true narrative of the past 10+ years, or to make a quick buck off of Elon Musk – they chose the latter, and these actions have consequences.”
The Cryptoverse insiders have tried to identify several causes for the latest bitcoin (BTC) fall that dragged the whole market down and it seems that history and arguments were once again repeating – many were bearish short-term and bullish long-term. (Updated at 16:53 UTC with the latest market data.)
And then, BTC crashed to almost USD 30,000, before recovering. At 13:48 UTC, BTC trades at USD 35,079 and is down by 22% in a day. Other coins from the top 10 list are down 27%-40%.
Earlier today, BTC dropped below USD 40,000 for the first time since February, and Crypto analytics firm Coin Metrics found it “inevitable” even before this happened. While BTC veterans appear to be “weathering the storm and continuing to hold for the long-term,” given the major upgrades coming this year, the analysts at Coin Metrics gave two reasons for the current drop.
First is Elon Musk’s changing positions on BTC and him moving back to dogecoin (DOGE), combined with Tesla removing BTC as a payment option, and their reason exasperating the Bitcoin energy consumption debate.
The second is the cyclical nature of crypto markets. “Despite the knee-jerk reaction to Musk’s Tweets, BTC’s recent downturn appears to be part of a larger trend. Crypto markets tend to be cyclical and move from periods of BTC domination to periods where smaller-cap assets reign supreme.”
And currently, we seem to be in an altcoin cycle, a big part of which is ethereum (ETH)’s surge and it outperforming BTC. Also, what the cycle led is the rise of “Ethereum competitors”, including ethereum classic (ETC), which resulted in BTC’s dominance dropping, as well as trading volume for smaller-cap assets surging.
Commenters online reiterated what had been reported earlier – that people seem to be rotating out of BTC into ETH.
Also, one more reason for the drop is once again repeating crypto ban FUD from China.
“This is the latest chapter of China tightening the noose around crypto,” Antoni Trenchev, Co-founder of crypto lender Nexo, told Bloomberg TV.
Then Matt Maley, Chief Market Strategist for Miller Tabak + Co, pointed to another potential cause that may have helped the price drop – Bank of America (BofA) fund manager survey showing that “Long Bitcoin” is the most crowded trade currently in the world.
“When an asset becomes the most crowded trade in the BofA survey, it has frequently signaled a near-term pullback in the past,” Maley told Bloomberg. “When you combine this with the news out of China, it’s not a surprise that Bitcoin is seeing some more weakness.”
And then there’s a full circle made, back to Musk, as his presence in the space may have actually damaged cryptos’ reputation, suggested David Bianco, Chief Investment Officer of the Americas at DWS Group. “I don’t think his comments are contributing to making [bitcoin] a more serious asset class. People look at it and think to themselves, this is just too much of a fad, it has too much popular culture attention,” he told Bloomberg. “Professional investors don’t want to hear about investments being talked about on Saturday Night Live.”
What’s next?
Many say that the price recovery will be slow, that a bear is imminent short-term, but that we’re in for a bull run after that.
Following China’s move and other developments, “Bitcoin investors are now in a state of fear, a situation that may influence further price drops,” Greg Waisman, co-founder of payment network Mercuryo, told Cryptonews.com. “Bitcoin’s recovery is, however, dependent on the coordinated effort by both retail and institutional investors to defy the market trend and load up on the coin. This recovery can occur at anytime as resistance is bound at this time.”
Waisman said that this drop is significant for the crypto space as most altcoins respond in tandem with the BTC price movement. “A continued fall without cushion may signal a broader entry into a bear market,” he added.
Per Coin Metrics, BTC spent output profit ratio (SOPR) dropped below 1 on May 15 to its lowest level since February 27, signalling that investors are selling at a loss. “This suggests that some investors who bought recently, while BTC price was near all-time highs, have capitulated and are selling their holdings.”
However, though not always accurate, a SOPR of below 1 has corresponded with local cycle bottoms. And this is not the only sign that “bullish sentiment has reset and that the local market cycle is nearing a bottom” – BTC perpetual futures average funding rates have come in closer to zero, at times even dipping negative.
Per Joe DiPasquale, CEO of crypto fund manager BitBull Capital, “bitcoin’s pattern over the last 10 years has been meteoric rises followed by pull-backs.” The trends has been higher highs and higher lows, he told Cryptonews.com, noting that, while it fell from its USD 63,000 high, it still saw a strong rise in the past 12 months.
Bitcoin mining only uses half the energy that the traditional banking system does, a new study claims.
Gold mining also uses up to twice the amount of energy of the bitcoin version, says the report, which was published by cryptocurrency investment firm Galaxy Digital.
The white paper study from the Galaxy Digital Mining team comes after Elon Musk fueled a debate on the energy consumption of bitcoin mining and announced that Tesla would no longer take it as payment for its electric vehicles.
Billionaire former hedge-fund manager Mike Novogratz is the CEO of Galaxy Digital, which made public all of its calculations.
The authors of the study estimate the energy consumption of the entire bitcoin network at 113.89 terawatts per hour, of which 99 per cent comes from the mining computers.
Bitcoin mining is the process of solving complex mathematical puzzles to verify bitcoin transactions and record them in the blockchain ledger.
This figure is lower than the University of Cambridge’s Centre for Alternative Finance, which estimated it at 128 terawatts per hour in March 2021.
Bitcoin mining (Image: Pixabay)
The CAF has estimated that the bitcoin industry as a whole now uses as much energy each year as a country the size of Malaysia.
The Galaxy Digital study claims that, by their calculations, bitcoin’s energy consumption is less than half that of the traditional banking system, which it estimates at 263.72 terawatts per hour, and gold mining’s 240.61 terawatts per hour.
The study admitted that “gauging the energy use of these two industries is not as easy as auditing bitcoin” and stated that their study was a “good faith effort to estimate the energy footprint of both the gold industry and banking system.”
The study stated that “the banking industry does not directly report electricity consumption data.”
And it says it made its banking calculation based on Galaxy’s estimations of power usage by banking data centers, bank branches, ATMs and card networks’ data centers.
To calculate the energy consumption of the gold industry, Galaxy Digital Mining says it used estimates for the industry’s total greenhouse gases emissions provided in the World Gold Council’s report titled “Gold and climate change: Current and future impacts.”
Social media critics were quick to point out that both the gold mining and banking industries are both significantly larger than bitcoin, yet only use twice as much energy according to the study.
Galaxy Digital responded to that criticism by saying that bitcoin’s energy consumption was not linked to its “transactional volume or throughput.”
Bitcoin is in the midst of a “historically significant correction.” What comes next?
Bitcoin’s latest price slump has got investors sweating. Do they have reason to worry? Not if you’re a long-time HODLer looking at the bigger picture, argues blockchain analysis company Glassnode in a report today.
The weekend dip—with Bitcoin trading down 26.1% over the course of the week—is the deepest correction the current Bitcoin bull run has experienced, says Glassnode.
Corrections, though, are common in the world of investments, and Bitcoin is no different. Whenever a market runs too hot, you can expect it to cool down until an equilibrium between buyers and sellers is met again.
But with Bitcoin now trading at 28% below the $63.6k all-time high set on April 13, could we be entering another bear market? Not necessarily, according to Glassnode data, which notes that Bitcoin has experienced comparable pullbacks in the not-so-distant past.
“This is the deepest correction of the current bull market, however is consistent with five major pullbacks during the 2017 bull,” researchers for the analytics firm argued in its The Week On-chain newsletter.
The current correction, according to the firm, is chiefly down to new investors panic-selling their coins due to billionaire investor Elon Musk’s controversial weekend comments.
Bitcoin Price on Trading View 2018 (Image: BIUK)
Musk, who in February bought $1.5 billion-worth of Bitcoin on behalf of his car company, Tesla, said last week that his firm would stop accepting Bitcoin, causing the price to drop. And on Sunday, he made cryptic comments that he might cash-out the Bitcoin investment, though he later clarified that Tesla doesn’t plan to sell the Bitcoin on its balance sheet.
“Unfortunately, this has led to widespread confusion in markets, although for many Bitcoin HODLers, this is just another day in the office,” Glassnode noted in its report.
“On-chain we can observe a notable bifurcation of reactions, with newer market entrants panic selling and realising losses, whilst long-term HODLers appear relatively un-phased by the news,” the report added.
Glassnode’s data found that the number of Bitcoin addresses holding a non-zero balance dipped 2.8% in the past week from the all-time high of 38.7 million—which is evidence of panic-selling.
Though this sell-off is in line with what happened in 2017. “If we observe the cyclical pattern of total supply held by short term holders, we can also see that a pattern of panic selling is playing out, similar to that observed at the 2017 macro peak,” the report stated.
Glassnode said in the report that the Bitcoin market usually finds a “macro peak” when new holders own a large proportion of the total supply. Now, that peak needs to come down, hence the correction.
One analyst also told Decrypt that though the pullback is a harsh one, it makes sense.
“I would say it’s a bit unexpected, this is the deepest pullback we’ve seen ever since the Bitcoin halving,” Jeremy Ong, who works in business operations at the crypto research firm, Delphi Digital, said, referring to the cryptocurrency’s once-in-four-years event that reduces mining rewards in order to keep inflation in check.
“But the bull market structure remains intact—historically, in bull markets, Bitcoin goes through 30-35% drawdowns,” he said, adding that “weak and newer investors tend to panic sell.”
Electric car manufacturer Tesla and its CEO Elon Musk once again moved the whole crypto market, triggering a sharp selloff, massive liquidations, and prompting speculations about Tesla’s move and reigniting debates about Bitcoin (BTC) mining. (Updated at 12:18 UTC: updates throughout the entire text. Updated at 14:50 with additional comments and the latest market data.)
Elon Musk announced that Tesla suspended vehicle purchases using BTC and is looking at other cryptoassets.
BTC plunged from almost USD 55,000 to USD 47,600, before recovering above USD 51,500 and correcting lower again.
At 14:48 UTC, BTC trades at USD 50,446 and is down by 10% in a day. The 24-hour BTC trading volume surpassed USD 110bn, compared with USD 68bn yesterday. Other coins from the top 10 club have also followed a similar path and are now down by 2%-13% in the past 24 hours, except cardano (ADA), which is up by 5%.
Meanwhile, total liquidations in the crypto derivatives market reached USD 4bn (392,741 traders “were liquidated”) in the past 24 hours, per Bybt.com data. BTC is responsible for USD 2bn, while ETH liquidations reached USD 742m.
“We are concerned about rapidly increasing use of fossil fuels for Bitcoin mining and transaction especially coal, which was the worst emissions of any fuel,” according to a screenshot, shared by Musk on Twitter.
It added the company still believes cryptocurrency is a good idea and has a promising future, “but this cannot come at great cost to the environment.”
Tesla said it won’t be selling any BTC it holds and intends to use it for transactions “as soon as mining transitions to more sustainable energy.”
However, in April, Musk agreed that BTC “incentivizes renewable energy.”
“We are also looking at other cryptocurrencies that use <1% of Bitcoin's energy/transaction," they concluded. This week, Musk asked his Twitter followers, whether the company should start accepting dogecoin (DOGE).
Ben Gagnon, Director of Mining Operations at listed BTC mining company Bitfarms, stressed that, according to data from Cambridge and Digiconimist Bitcoin Electricity consumption index, Bitcoin only represents approximately 0.1% of the global man-made emissions.
"And these emissions are largely a result of consuming electricity that would otherwise be lost due to lack of demand or cost-effective energy storage systems," he said in an emailed comment.
Tesla started accepting BTC in March this year.
Industry players seem unconvinced that Tesla was not aware of the carbon footprint of Bitcoin mining, and speculate that this decision to suspend BTC payments might be related to subsidies Tesla is receiving from the US government.
Moreover, just yesterday, Reuters reported that Tesla is seeking to enter the multi-billion dollar US renewable credit market, hoping to profit from the Biden administration’s march toward new zero-emission goals.
"It's difficult to understand how this issue was not identified during their initial due diligence process. For me, the timing of the announcement seems arbitrary. This news is not new nor surprising but yet forced the price down 17%. It really demonstrates the vast information asymmetry in this industry and the oversized role Musk has on influencing the price of bitcoin. These issues will consistently catch retail investors out," Luke Sully CEO of Ledgermatic, a crypto treasury technology specialist, told Cryptonews.com.
According to him, buying a car with BTC doesn't make much sense and Tesla has not disproved that assumption.
Read more: cryptonews
Over the last 40 years, monetary policy has caused interest rates to decline from a high of around 20% down to the zero bound. During the same period, the US dollar (USD) money supply has expanded at a rate never before seen in modern history and asset prices in dollar terms exploded to the upside, all while the US average hourly wage has lagged on an unprecedented scale.
Ironically, the growing wealth gap, caused by lagging wages and rising asset prices, has occurred while the Federal Reserve (Fed) has been targeting a 2% inflation rate and pushing the narrative that inflation is good for the economy, good for economic growth and most of all, good for the average Joe. This makes us wonder why the Federal Reserve, through monetary policy, is adjusting interest rates and setting inflation targets and whether this intervention is really benefiting the economy.
To start, let’s focus on the question: why are we seeing this intervention from the Fed? The US has a total debt to GDP (Gross Domestic Product) ratio of 257%¹. This fragile debt house of cards, which the Federal Reserve has created, has caused them to fear deflation and its effects on the economy. The Federal Reserve is then essentially forced to intervene so that they are not perceived as the ones allowing the economy to collapse. They do this primarily through the lowering of interest rates and through inflation, or in other words, a debasement of the currency through an expansion of the money supply. This intervention leads to an increase in consumption, asset purchases and mal-investment, which in turn leads to an ever-increasing debt burden and therefore an ever greater deflationary headwind on the economy. The cycle then repeats itself with the Fed having to intervene time and time again. The Federal Reserve is stuck in a negative feedback loop which they themselves have created.
Gold bullion (Image: Stevebidmead/Pixabay)
What are the side effects of inflation?
First, let’s look at the effects of inflation from the consumer perspective. Let’s imagine for a second that the government suddenly doubled the total supply of dollars in the system. In theory, everything would double in price as the value of the currency would be halved. Now, the producers of a product or service essentially have 3 options:
They could double the price of their product or service to maintain their current margins. The side effect of doing so is that they will most likely drive away customers.
They could maintain the current price. The side effect of doing so is that they will take a hit on their margins and therefore their bottom line.
They could maintain the current price, but reduce the quality of the inputs which make up their product or service. The side effect of doing so would be that they would provide their customers with a lower quality product or service, but maintain their margins.
What tends to happen is that the producer chooses either option 1 or 3 in order to take the path of least resistance and reduce a potential hit to their bottom line. We therefore have this byproduct of inflation whereby the producer now has to either raise the price of the product or service or deceive the consumer by lowering the quality of their product or service. Both of which leads to the consumers losing out.
Second, let’s look at the effects of inflation from an asset perspective. As inflation devalues the currency’s purchasing power, it causes both the price and demand of assets to increase, which in turn artificially increases scarcity. This creates knock-on effects in the form of conflict and social unrest, as disputes arise over ownership of assets. Monopolization then tends to ensue in order for those in power to maintain control due to the increasing scarcity and price of assets. We then have the bigger issue, whereby huge wealth inequality between the holders of these assets and the holders of the currency starts to appear as the currency loses purchasing power. This can be seen in the lagging average hourly wage in relation to assets in the chart below.
What’s worse, is that over the last decade this lagging of wages to asset prices has only increased (as shown in table 1 under the Jan 2010 — Jan 2021 column). This has caused one of the greatest transfers of wealth from the lower class to the upper class in recent history.
To play devil’s advocate, when inflation was initially implemented, the central banks had good intentions. Inflation in the form of monetary expansion, or interest rate adjustment, is a way for the Federal Reserve to attempt to dampen short term volatility by stimulating the economy in times of stress. However, the issue is that volatility is just energy, which as we know from the first law of thermodynamics, cannot be destroyed. Instead, it is just transmuted, and so by trying to prevent/dampen short term pain in the economy, this instead delays the pain and amplifies its future effects. This is why the initial bump in debt, in the form of monetary and fiscal stimulus in times of stress, evolves into this beast of constant debt expansion in order to prevent economic collapse.
