Grayscale claims that the recent inflation data may be bearish for Bitcoin in the short term, but in the long term they see it as a positive development.

According to Grayscale analysts store of value assets like Bitcoin continue to attract more capital as the US government grows its debt.

Especially in a scenario in which interest rates remain high due to inflation.

Why is that bullish for Bitcoin?

Zach Pandl, the head of Grayscale’s research department, claims that high inflation means the US Federal Reserve cannot simply cut interest rates.

This means that the US government will have to transfer more and more of its debt to the current high interest rates. This causes annual interest costs to rise, causing budget deficits to increase, debts to grow further and interest costs to rise again.

“The Fed cannot cut rates as long as core inflation remains so high, but the strong nominal growth of the economy, the upcoming halving and adoption trends such as tokenization are creating a positive environment for the crypto markets,” said Pandl.

Inflation rose by 0.4% month-on-month and 3.5% year-on-year in March. This was once again higher than the estimates of 0.3% and 3.4%.

Bearish in the short term?

The real interest rate on 10-year US government bonds rose by 19% from February to March to 1.934%. According to Grayscale, this could cause investors to switch from risk assets such as Bitcoin to more stable investments such as US government bonds.

A positive real interest rate means that investors can beat inflation by simply buying government bonds. The interest rate on 10-year government bonds is now 1.934% higher than inflation.

From December 2017 to January 2018, the real interest rate rose by 52.35% from 0.573% to 0.873% and at that time the Bitcoin price began a long bear market.

Funnily enough, Bitcoin doesn’t seem to be affected by that high inflation rate at the moment, which may have to do with the weak financial health of the US government.

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