As the Federal Open Market Committee (FOMC) meeting scheduled for May 6-7, 2025, draws near, many are anticipating interest rate cuts from Fed Chairman Jerome Powell. When there is a cut in interest rates, inflation increases, and the masses tend to turn towards an asset like cryptocurrency that is not influenced by inflation.
When trying to understand the correlation between interest rates and inflation, “The conventional view among economists is that higher interest rates lead to lower inflation. The rationale behind this view is that higher interest rates increase the cost of borrowing and dampen demand across the economy, resulting in excess supply and lower inflation,” according to the International Monetary Fund.
What is inflation?
According to the IMF, “Inflation is the rate of increase in prices over a given period of time. Inflation is typically a broad measure, such as the overall increase in prices or the increase in the cost of living in a country.” In other words, inflation refers to the increase in the price of goods and services that an average person would need to go about their daily lives. Conversely, it reflects the decrease of purchasing power of money.
Measuring inflation
For instance, an average person will have to cover housing expenses, including rent and mortgages, food expenses, electricity and water bills, etc. “To measure the average consumer’s cost of living, government agencies conduct household surveys to identify a basket of commonly purchased items and track over time the cost of purchasing this basket.” The government calls the cost of this basket compared to a base year the Consumer Price Index (CPI). And the percentage change of CPI over a given period of time is known as Consumer Price Inflation.
Current interest rates
As shown in the chart above, the FOMC has been maintaining the federal funds rate between 4.25% and 4.5% as of March 19, 2025. However, based on the Fed’s projection, there are two interest rate cuts of 0.25 percentage points each. As such, the rates could be anywhere from 3.75% to 4% by the end of the year.
Given the context that there is an interest rate cut, which will increase inflation, the question is whether crypto is a good hedge against inflation. Let’s take a look at the characteristics of BTC and find out whether it could be used as a hedge against inflation.
Limited Supply of Bitcoin
Bitcoin, which is viewed by many as the “digital gold,” is not controlled by central authorities and, apart from being decentralized, it has a limited supply of 21 million. This scarcity makes it immune to inflation, just like gold. However, BTC is better as “it’s more portable, easily verifiable, and resistant to confiscation.”
Decentralization
Bitcoin has no central authority over it, like the central bank has authority over fiat currencies. Therefore, people tend to look for alternatives where their currency is devalued due to hyperinflation. Back in 2019, a cup of coffee cost 2,800 bolivars (21p; 28 cents) in Venezuela, up from 0.75 bolivars 12 months ago – an increase of 373,233%, according to Bloomberg data. And this was after a 2018 devaluation knocked five zeros off the currency. As a result, many citizens started using bitcoin and other currencies.
Increase in institutional adoption
Institutions like BlackRock, Fidelity, and BNY Mellon started integrating bitcoin into their offerings after the bitcoin ETFs were approved. This increase in institutional adoption has reinforced Bitcoin’s position as a store of value. When large-scale institutions like hedge funds and corporations utilize BTC, this will decrease the volatility of BTC prices, making it more of a financial asset that could withstand inflation.
Alternative to traditional asset
Gold and real estate have been a go-to option during inflation. However, these come with their own set of drawbacks. For instance, real estate needs premium capital to invest and lacks liquidity, while Gold is difficult to verify, and central banks can influence supply. However, BTC is not influenced by a single entity, and it is liquid.
