Bitcoin, Inflation & Tesla

Ocasionally financial markets react to news in bizarre ways.

On Wednesday stock markets tumbled after the monthly inflation report showed US consumer prices accelerating at their fastest pace since 2008 in April, rising 4,2% year over year and 0,8% month over month, way above economists’ expectations.

The monster of Stagflation is finally rearing its ugly head again, after more than a decade of massive money printing by central banks.

The central bankers thought “Quantitative Easing” would boost economic growth without stoking inflation. But ultimately this unprecedented monetary experiment may end with spiralling inflation and stagnating growth – with Milton Friedman lecturing from heaven that “inflation is always and everywhere a monetary phenomenon”.

Ironically, Bitcoin, which was created precisely as an antidote to inflationary monetary policies, also plunged after the inflation report.

The Bitcoin dump accelerated further after Elon Musk tweeted that Tesla will not be accepting Bitcoin payment for Teslas after all, (which do raise some interesting questions about the company’s due diligence practices, but never mind).

On the face of it the tweet is bearish for the Bitcoin price, which duly tanked as low as $45.000.

But, how many people would have exchanged Bitcoin for Teslas anyway? Probably not many. And those few would already be holders of Bitcoin. Nobody would exchange fiat currency for Bitcoin for the purpose of buying a Tesla. Ergo, the initial Tesla announcement of Bitcoin acceptance, though much hyped at the time, did not imply any new marginal demand for Bitcoin. If anything, Musk’ statement may inadvertently lead to less demand for Teslas from Bitcoiners.

Likewise, Wednesday’s reversal statement from Musk should not have any implications for Bitcoin demand. Despite dressing up the announcement in environmentally conscious lingo the bottom line is that Tesla will keep hodling Bitcoin. Mr Musk is a mercurial character and it is not easy to know if he has a bigger plan or is just acting ad hoc, but in this case it may very well be the latter.

In any case Mr Musk’s tweet sowed much fear, uncertainty and doubt. But in a world where consumer prices are accelerating ominously, Tesla’s self-appointed techno-king is presenting late-coming hedge fund managers and the Michael Saylors of the world with an opportunity to pick up Bitcoin on the cheap. As I write this the price is already back above $50.000 again, (Caveat Emptor)