Is Bitcoin a hedge against inflation? Why BTC has struggled during periods of high inflation
Bitcoin’s status as an inflation hedge has come under scrutiny in the current market, but experts point toward the exceptional market conditions.
Bitcoin has been projected as many things since its inception in 2009. However, the most talked about aspects have been a fungible form of future money and an inflation hedge.
The last Bitcoin (BTC) halving cycle (a block reward halving event that happens approximately every four years) coincided with the raging COVID-19 pandemic, which solidified many people’s belief in the nascent tech as a true hedge against inflation and worldly disorders. One year down the line, however, BTC has lost 75% of its market capitalization and not many would agree with the inflation hedge theory.
During the last year’s bull cycle the likes of Microstrategy, Tesla and numerous other public companies doubled down on Bitcoin’s inflation hedge aspect by adding Bitcoin to their company treasuries. Microstrategy started buying BTC when the price of the top cryptocurrency was trading in the sub-$10,000 price range and continued its purchases until the market reached the top with BTC price near $69,0000.
The decision looked very lucrative in the beginning as the BTC price was touching new highs every month and many in the crypto community hailed Microstrategy CEO as the crusader for Bitcoin’s “inflation hedge” case. However, the sentiment in the community changed quickly with the advent of the bear market, which only got worse with soaring inflation caused by various geo-political issues like the war in Ukraine and subsequent food supply and energy crises.
At present, inflation rates have touched new highs across the world and many countries are struggling to avoid a recession. Bitcoin, like most other assets, is struggling to remain a lucrative investment option, but that doesn’t necessarily mean it has completely failed as an inflation hedge, some say.
Kasper Vandeloock, CEO at quantitative crypto trading firm Musca Capital, believes that BTC is still among the strongest performing asset despite the downturn, but it depends on how one frames it:
“Sure, it is down 75%; however, that is compared to the strongest asset out there if we compare it to currencies such as the Turkish lira, it shows more strength. Besides, it is not like other hedges such as gold that have never encountered a large drawdown. One factor many people forget about is that an inflation hedge is a kind of ‘insurance’ thing such as real estate, while gold is hard to store and sell since it’s illiquid. Bitcoin offers many advantages that those assets don’t.”
Talking about the role of Microstrategy, Vandeloock believes that the Fortune 500 company’s bet has more than succeeded when it comes to MicroStrategy, “Since we can’t get an exchange-traded fund, how can we create a vehicle so others can speculate on the price of Bitcoin? That is what MicroStrategy tries to accomplish and they have succeeded.”
The idea of Bitcoin being a hedge against troubled financial markets is derived from the top cryptocurrency’s inherent properties such as a fixed supply of 21 million with central control of its monetary policy. Bitcoin proponents believe that a scarce supply added with growing acceptance in the mainstream would eventually make it a better inflation hedge than gold and other similar safe-haven assets. Others believe that the time frame will play a key role as well, given BTC is still a nascent asset class compared to others.
the advancing dollar
Bitcoins unsure function as a hedge towards marketplace situations will be attributed to numerous elements, together with some macroeconomic ones. The contemporary marketplace downturn isn’t always simply due to the delicate economic marketplace. In fact, marketplace situations are worsened by means of numerous outside crises, inclusive of the continuing geopolitical tensions that have in turn fueled economic instability.
Experts are of the opinion that in instances of geo-political crisis, the US dollar will become the number one inflation hedge. The head of blockchain and crypto studies at Uphold, instructed Cointelegraph that none of the properties are presently presenting a hedge towards inflation due to the USD’s electricity:
“We all thought that Bitcoin was going to be an inflation hedge, but it seems in instances of conflict, the safe haven continues to be the U.S. greenback, which tasks the navy more than decentralized laptop networks like Bitcoin. “Crypto has been harmed via means of the sturdy USD, in addition to the multitude of phishing scams and hacks that have happened when you consider the start of the year.”
He claims that Bitcoin’s truly decentralized nature lessens its allure in times of conflict because it is not sponsored by any government.Thus, the main variables in the problem are “Russia’s conflict in Ukraine and the Fed’s inflation outlook.”Put the ones collectively and we can see USD electricity and, in flip, Bitcoin weakness. ”
If a kingdom creates extra fiat cash, the cash delivery will increase. As it is obvious at some stage in records, once extra cash circulates, the market capitalization of BTC regularly increases, indicating that BTC does act as a hedge against this kind of inflation. Simply put, if the enlargement of fiat currencies accelerates, so does the market capitalization of all Bitcoins.
According to Konstantin Anissimov, chief operations officer at crypto exchange CEX.IO, BTC allows for hedge against certain types of inflation.However, there are nevertheless elements that affect property values past inflation, he explained:
“The roots of charge inflation may be embedded within the geopolitical panorama and the ebb and float of the worldwide economy. These are factors that few properties are shielded from, with BTC being no exception. While BTC can assist in hedge towards certain sorts of inflation, a little nuance is needed to unpack that sentiment. “
The boom as an inflation hedge has been considerable on a long-time period scale. However, the prevailing macroeconomic situations have impacted the economic markets throughout asset training. It is no longer only BTC that has failed to show resilience in the face of raging inflation; even some of the most reliable asset classes, such as gold or government bonds, have failed to provide protection in the modern marketplace.
