US inflation data caused Bitcoin to pull back to $100,000. What are the obstacles?

Bitcoin traded 4.1% lower on Nov. 14 after U.S. inflation data came in slightly above market expectations. The decline mirrored the S&P 500 futures, which fell from 6,023 to 5,980 in four hours.

As a result, traders are now beginning to question the extent of this correlation and when Bitcoin’s inflation-hedging properties might provide some protection in an environment of persistent inflation.

S&P 500 futures (left) vs. Bitcoin/USD (right). Source: TradingView

Although the US Producer Price Index (PPI) rose 2.4% year-on-year in October, slightly above the consensus of 2.3%, this did not change the consensus outlook of the Federal Open Market Committee (FOMC) to cut interest rates by 0.25% in December. However, there are growing doubts about the Fed's ability to maintain its rate cut trajectory until 2025.

Continued inflation and Bitcoin’s role as a hedge

Historically, Bitcoin has benefited from inflation concerns. However, in 2021 and 2022, government liquidity injections led by stimulus checks and the Fed's balance sheet expansion have blunted these effects. At the time, recession risk was minimal despite rising costs. Today, the situation has changed; while the labor market remains relatively strong, traders are cautious and expect corporate earnings to face pressure.

While the new administration under Donald Trump has proposed cost-cutting measures and strategies aimed at strengthening the dollar, these actions could pose a short-term challenge to risk assets. For example, a Reuters report that a $7,500 tax credit for electric vehicle buyers could be eliminated caused Tesla's stock price to fall nearly 5% on November 14.

Similarly, the recent appointment of Elon Musk and Vivek Ramaswamy to lead a new government agency aimed at streamlining bureaucracy and restructuring federal agencies could result in some job losses and reduce the amount of money available for individuals and businesses to invest. This dynamic could affect the stock market and could spread to other sectors, including real estate, commodities, and Bitcoin.

U.S. government spending (left) versus Bitcoin/USD (right, logarithmic). Source: TradingView

US fiscal policy and its impact on Bitcoin demand

One of Bitcoin's main roles is as an alternative reserve asset, providing a hedge against currency depreciation when the government expands spending. If the U.S. government successfully limits spending growth, demand for Bitcoin as an inflation hedge may decrease because investors will have less risk holding dollars.

However, given Bitcoin’s appeal as a censorship-resistant, transparent asset, it is uncertain whether investors will actually lose interest in Bitcoin’s scarcity value. Unlike gold, stocks or real estate, Bitcoin’s extremely predictable issuance schedule can support its demand, even if it does not directly compete with the dollar, especially in the initial stages of adoption.

Bitcoin's recent intraday performance is in line with the stock market, reflecting concerns about persistently high inflation. However, from a broader perspective, the United States' fiscal challenges are likely to remain as government spending is unlikely to be cut significantly amid recession risks.

Ultimately, Bitcoin’s trajectory toward $100,000 and above could withstand temporary pressure from short-term investors’ concerns about inflation.