Now, El-Erian predicts that bitcoin will go up when the Fed takes action to control inflation.

Speaking to CNBC on Monday, Allianz Chief Economic Advisor Mohamed El-Erian said bitcoin is likely to move higher when the Fed responds to inflation. He commented: “That’s what you get when you’ve waited too long to recognize what inflation is and to take action.”

El-Erian noted that liquidity injections were a relic of the past, and the new normal is that liquidity would be sucked out of the system.

Restoration of value

He explained: “There’s a reason why, and that’s because crypto, unlike gold, benefited enormously from all the liquidity injections. So what you’re getting in crypto is a tug of war between a recognition that liquidity is going out from the system as a whole and attractiveness as a diversifier. So far, it’s the liquidity element that is winning out.”

He added: “What you are seeing across the board is the restoration of value, and that’s a good thing. You’re seeing it in stocks, you’re seeing it in bonds, you’re seeing it in crypto.”

Asked to comment on the recent decline in cryptos from all time highs, El-Erian said: “I think the concern for the crypto people is that this decline is happening at a time when gold is up and hitting almost $2,000,” he opined. “Because the big argument for crypto is it’s a diversifier. At the time of inflation, it’s attractive. And recently, crypto hasn’t played that role.”

The economist stated that the Fed would suffer a crisis of confidence because they underestimated inflation, and would now have to take a controversial decision on whether to raise the inflation target from 2% to as high as 3%.

In these circumstances, both gold and cryptos would head higher, El-Erian said.

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