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Can Bitcoin be used as a hedge asset against rising inflation?

Many people have compared BTC’s anti-inflation properties to gold’s, but there are significant differences between the two assets.

The United States Bureau of Labor Statistics reported on Feb. 9 that the Consumer Price Index, a key measure capturing changes in how much Americans pay for goods and services, had increased by 7.5 percent compared to the same time last year, the largest year-on-year increase since 1982. Before the global COVID-19 pandemic, the indicator stood at 1.8 percent in 2019. With such a sharp rise in inflation, more and more people are asking the age-old question: Could Bitcoin, the world’s largest cryptocurrency, become a hedge asset for times of high inflation?

What’s the deal with the recent inflationary surge?

The fundamental reason for the unprecedented inflation spike is, ironically, the strong health of the US economy. Immediately following the COVID-19 crisis, when 22 million jobs were lost and national economic output plummeted, the American economy began a massive recovery on the heels of the vaccination campaign’s relative success. However, supply chains appeared unprepared for such a rapid resumption of business activity and consumer demand.

The Biden administration’s $1.9 trillion COVID-19 relief package fueled the rebound, with the majority of American households receiving thousands of dollars in direct federal assistance. According to Tom Siomades, chief investment officer at AE Wealth Management, the stimulus was excessive given the overall financial situation of US households. He said in an interview. 

“The $1.9 trillion CARES Act, passed in March at a time when Americans were already saving at a 20% rate, injected more money into the economy than it could bear.” That money allowed people who would have gone back to work to reconsider their options. This resulted in a labor shortage, which increased demand for higher wages, resulting in higher costs and prices.”

Some economists point to a more subtle factor: an alarming exercise of corporate pricing power by businesses in the United States.

“Producers will be unwilling to accept lower prices for their products now that they know people can pay more,” Siomades explains.

Now that inflation has emerged as a major political issue for the Democratic Party, all eyes are focused on the Federal Reserve’s efforts to address it. By the end of the year, the inflation wave is expected to fade gradually, if not to pre-pandemic levels, then to more moderate levels. Nonetheless, as rising prices become a source of public concern, private citizens and investment professionals alike begin to look for a safe haven for their funds and this is where Bitcoin comes in.

Bitcoin is being referred to as the “new gold.”

The frequency of comparisons to gold in terms of reserve-asset potential grows with each year that Bitcoin and the cryptocurrency sector become more mainstream. Many observers believe that Bitcoin may be even more appealing than gold in this regard. In November 2021, the leading cryptocurrency was up 133 percent year on year, compared to gold’s 4 percent.

According to Todd Ault of investment firm Ault Global Holdings, Bitcoin has massively outperformed US inflation over the last 13 years, thanks in part to the asset’s deflationary properties. 

“What makes it a great store of value and inflation hedge is that mining it has a cost; there will only be $21 million Bitcoin.” That is, there is a limited supply of Bitcoin to be mined Really, it’s still a traditional hedge that people think about; there’s limited supply, and it’ll continue to be in demand even in the current financial climate.”

Bitcoin, unlike gold, lacks the key characteristics of a predictable, low-volatility asset. This may not be a problem for a devoted Bitcoin hodler who believes in Bitcoin’s ultimate monetary dominance, but for someone who has invested a significant portion of their personal savings as a hedge against inflation, the unpredictability may be unsettling. In some ways, Bitcoin’s price swings contrast sharply with gold’s relative stability, which serves as a preserver of purchasing power rather than a wealth multiplier.

“Bitcoin, in theory, should be a good inflation hedge because there is a limited supply of tokens that can be mined.” As Katie Brockman, analyst at investment advisory firm The Motley Fool, explained in an interview, “this creates a form of scarcity, which could help it hold its value over time compared to fiat currencies.” However, Bitcoin can only be used as a store of value if a large number of people value it. Brockman continued, saying:

“It does not appear that Bitcoin has progressed to that point.” While inflation has risen, the value of Bitcoin has fallen in recent months. It has also declined at roughly the same rate as meme tokens such as Dogecoin, implying that many investors regard Bitcoin as just another cryptocurrency rather than a store of value.”

However, just because Bitcoin is an imperfect inflation hedge right now does not mean it will never be a dominant store of value. However, if the currency is to become inflation-proof, it must gain widespread acceptance as well as a solid mainstream reputation.

Over time, hedge

Bitcoin’s value will also be determined by how investors use it. If people are holding BTC as a hedge against inflation, it may not experience the same volatility cycles as equity markets. However, if most investors trade Bitcoin like stocks, the asset’s price may be more correlated with market fluctuations.

The top cryptocurrency’s future appears bright, though the timeline is less certain. Ault believes the volatility will end around $2 million per BTC. He continued, saying:

“Bitcoin is expected to become a multi-trillion-dollar asset class as a result of this process.” That makes it a hedge over time rather than a direct hedge.”

Uneven distribution of crypto wealth is one issue that may become more pronounced in the future. As interest in BTC grows in waves and the entry cost for investment rises, it is unavoidable that large portions of its monetary stock will concentrate among a small number of wallets.

This brings us to the Bitcoin paradox. To become the “new gold” in terms of conservative inflation hedging, the original cryptocurrency appears to need to outgrow its speculative appeal and become a widely (and possibly more evenly) dispersed mass of money. A solid regulatory framework for cryptocurrency is one thing that could undoubtedly aid the asset class in achieving these objectives.

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

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