Covert Federal Reserve Dollar Crisis Expected to Trigger a Bitcoin Surge Comparable to Gold

Bitcoin and crypto prices have soared since the election of incoming U.S. president Donald Trump—who is plotting a bitcoin price game-changer after predicting bitcoin could eclipse gold.

The bitcoin price has, however, dropped back after topping $100,000 per bitcoin, sparking fears of a looming crypto market crash.

Now, as traders scramble to stay ahead of the Federal Reserve, analysts have warned of a possible Fed crisis that could spark another bitcoin price boom.

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“Current inflation measures, such as consumer price index (CPI) and producer price index (PPI), are significantly lower than previous 40-year highs. However, they remain ‘stubborn’ or ‘sticky,’ resisting a return to the central bank’s preferred 2% target,” Fidelity Digital Assets research director Chris Kuiper wrote in a report that asked: “Why is no one talking about stagflation?”—defined as a combination of low economic growth and persistently high inflation.

"With persistent significant structural fiscal deficits and the Federal Reserve now entering a cycle of rate cuts, it's easy to foresee a resurgence of inflation in a second wave. Should this pattern persist and the results deviate from a 'soft landing' or a standard recession, we may swiftly find ourselves facing stagflation."

In recent years, U.S. debt has skyrocketed, exceeding $34 trillion as we entered 2024. The financial impact of Covid and the subsequent stimulus measures implemented during lockdowns have led to significant government expenditure, which in turn has fueled rampant inflation throughout 2022.

Inflation of over 10% forced the Federal Reserve to hike interest rates at a historical clip, pushing up debt interest payments and fueling fears of a “death spiral.”

Last year, Jamie Dimon, the influential chief executive of Wall Street giant JPMorgan said he wouldn’t rule out a stagflation scenario emerging, even as inflation began to come off its recent highs, while last month tech investor and podcaster Chamath Palihapitiya called stagflation one of his “key words” for 2025.

Earlier this month, analysts at the The Kobeissi Letter said they saw “more evidence of stagflation,” warning: “We have rising prices with a weakening labor market. Stagflation is here.”

On Friday, the most recent U.S. employment figures revealed that hiring surged in December, exceeding forecasts and delaying any immediate considerations for additional interest rate cuts by the Federal Reserve. This comes after Fed chair Jerome Powell initiated a series of cuts in September, which was followed by another reduction in December.

James Toledano, the chief operating officer at Unity Wallet, shared his insights via email, stating, “The Federal Reserve's slower-than-expected approach to cutting interest rates is raising significant concerns, which could be negatively impacting speculative assets such as bitcoin. This situation is further exacerbated by stronger-than-anticipated U.S. economic indicators, including solid job openings and impressive purchasing managers index (PMI) data. As a result, worries about persistent inflation are growing, driving up rate expectations and consequently constraining liquidity in risk-sensitive markets.”

Concerns have been raised that the proposed extensive tariffs and significant deportation of undocumented immigrants by U.S. president-elect Donald Trump might lead to increased inflation.

“Toledano remarked, ‘We must also acknowledge the significant profit-taking that occurred following Bitcoin’s remarkable rally in 2024, which was fueled by the optimism regarding Donald Trump’s supportive approach to cryptocurrency. Currently, there's a palpable tension as everyone awaits Trump’s inauguration on January 20, with the anticipation that the crypto market will experience another surge. This period feels like a lull before the upcoming storm. Additionally, the uncertainty surrounding the policies that his administration will implement may also be dampening investor excitement.’”

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According to CME's FedWatch tool, traders are anticipating that the Federal Reserve will maintain its current interest rates during the January meeting. In its December assessment, the Fed indicated that it expects only two quarter-point rate reductions this year, a decrease from the four cuts it had predicted in September, citing the resilience of the economy and persistent inflation pressures.

Haider Rafique, the global chief marketing officer at the bitcoin and crypto exchange XBTO, expressed in an email following the Fed's December interest rate reduction that “if the Fed lowers rates while inflation keeps climbing, it may create a situation where prices rise and growth slows down—this scenario could lead to stagflation. Such a development would present considerable difficulties for both traditional markets and the digital asset sector, as investors might lose confidence in the face of unpredictable economic conditions.”

This coming week, the next CPI report is expected to show inflation of 2.8% in December, up from 2.7% a month earlier, according to economists polled by Reuters.

"In our view, should the U.S. face a stagflation situation, bitcoin's performance would largely hinge on how fiscal and monetary policies are implemented. If policymakers decide to tackle the 'stag' aspect by ramping up spending or utilizing monetary measures, bitcoin might see positive performance, although it may experience some delays," Kuiper noted, referencing gold's performance during the stagflation period of the 1970s and early 1980s.