The impact of inflation on the price of Bitcoin against the Canadian dollar (BTC/CAD) is a process involving multiple factors working together, and its mechanism and extent of influence vary with the market environment. Data shows that inflation shocks mainly affect the BTC/CAD exchange rate through three key channels: changing the macroeconomic environment, expectations of monetary policy, and the behavior of market participants.
When Canada’s inflation data exceeds market expectations, it often triggers significant short-term market fluctuations, directly affecting the BTC/CAD price. For instance, the 5.8% year-on-year increase in the CPI released by Statistics Canada in June 2022 far exceeded the market’s widespread expectation of 5.4%. Within 24 hours after the release of this data, despite the weakening of the global market, the BTC/CAD ratio rose sharply from approximately 47,500 Canadian dollars to nearly 49,200 Canadian dollars, an increase of 3.6%. This situation is partly due to the fact that some investors view Bitcoin as a potential “digital gold” anti-inflation tool, whose scarcity (a fixed total of 21 million) contrasts with the unlimited supply of fiat currency. Between 2021 and 2022, Canada’s CPI remained above the upper limit of the 2% target control range set by the Bank of Canada for 18 consecutive months. During this period, although the price of BTC/CAD experienced significant fluctuations, it rose by approximately 75% overall (from about 35,000 Canadian dollars to a peak of about 61,000 Canadian dollars), demonstrating the appeal of some of its safe-haven attributes.
However, the persistently high inflationary pressure will eventually force the Bank of Canada to adopt aggressive monetary tightening policies, which often pose a strong resistance to BTC/CAD. To curb the persistently above-target inflation rate, the Bank of Canada raised interest rates by a cumulative 425 basis points from 2022 to early 2023, pushing the benchmark interest rate from 0.25% to 4.5%. Such measures will significantly increase the opportunity cost of holding high-risk non-interest-bearing assets like BTC/CAD. According to an analysis by Bloomberg, during the interest rate hike cycle, the BTC/CAD price shows a significant negative correlation with the real yield of Canadian bonds, with a correlation coefficient of -0.71. Data shows that from the peak of the interest rate hike cycle (March 2022) to the low point in 2023, the price of BTC/CAD has shrunk by more than 65%. The high-interest-rate environment has had a significant crowding-out effect on funds in the cryptocurrency market, with the average daily trading volume shrinking by approximately 30%.
In reality, the effectiveness of BTC/CAD as an inflation hedging tool is constrained by other forces such as market risk appetite and regulatory policies. Although theoretically, Bitcoin’s deflationary design (halving the block reward by 50% every four years) should benefit it in a fiat currency devaluation environment, historical practice is much more complicated. For instance, during the period when the global energy and food prices soared due to the Ukraine geopolitical conflict in 2022, pushing up global inflation, the price of BTC/CAD deviated from its theoretical safe-haven attribute, plummeting by 18% in the week of the conflict’s outbreak. This indicates that the widespread liquidity crunch in the market under extreme risk events can outweigh its anti-inflation attribute. At the same time, the uncertainty of the Canadian federal government regarding the regulatory framework for cryptocurrencies (such as the 2023 “pre-registration” system proposal), as well as the risk events of the collapse of centralized platforms like FTX and Celsius in 2022, which caused consumers to lose over 32 billion Canadian dollars, have all increased the external costs and uncertainties of holding BTC/CAD. It has weakened its core value proposition in dealing with inflation.
On-chain data provides a micro window into how changes in inflation expectations guide funds towards BTC/CAD. Analysis on the Glassnode chain shows that when the Bank of Canada announces a pause in interest rate hikes or market inflation expectations decline, the net inflow of Bitcoin into Canadian exchanges often rises sharply in a short period of time. For instance, when the CPI data slowed to 2.9% in January 2024 (the previous value was 3.4%), major Canadian trading platforms recorded a net inflow of over 87 million Canadian dollars of btc in cad a single day, and BTC/CAD rose rapidly by 8.5% within three days. Meanwhile, despite the peak of interest rate hikes, the number of Canadian addresses holding more than one BTC increased from approximately 128,000 in January 2023 to 155,000 in June 2024, with an annual growth rate of 21%, indicating that a portion of long-term investors have continued to allocate BTC/CAD positions amid inflation fluctuations. On-chain derivatives market data shows that before and after the release of key inflation data, the trading volume of options used by Canadian traders to hedge against short-term price fluctuations can surge by 300%, and the peak nominal value of the contracts can reach hundreds of millions of Canadian dollars.
It can be seen that the impact of inflation on BTC/CAD is not simply linear. Its transmission path interweaves multiple dimensions of forces such as risk-averse demand, interest rate policy pressure, market risk sentiment and on-chain capital flows. Investors need to pay attention to the Canadian CPI report, the central bank’s interest rate decision and the fluctuations in the derivatives market simultaneously in order to have a more comprehensive understanding of the complex performance of this exchange rate in an inflationary environment. For investors who are interested in gaining a deeper understanding of the current specific trends of BTC/CAD and its underlying trading data, it is recommended to keep an eye on the latest market depth and liquidity indicators provided by local large trading platforms regulated by the Canadian CSA.