Can Bitcoin be used as a hedge asset?

Can Bitcoin be used as a hedge asset?

On February 9, the United States Bureau of Labor Statistics reported that the Consumer Price Index, a key measure reflecting changes in the price Americans pay for goods and services, rose 7.5% from the same period last year, marking the most strong year-on-year increase since 1982. In 2019, before the global COVID-19 pandemic broke out, the indicator stood at 1.8%. Such a rise in inflation is causing more and more people to ask the old question: Could bitcoin, the world’s largest cryptocurrency, become a hedging asset in times of high inflation?

What about peak inflation?

Ironically, the fundamental reason for the unprecedented surge in inflation is the health of the US economy. Immediately following the COVID-19 crisis, when 22 million jobs were lost and national economic output suffered a massive decline, the US economy began a massive recovery following the relative success of the vaccination campaign. However, supply chains seemed unprepared for such a rapid return to business activity and consumer demand.

The rebound was fueled by the Biden administration’s grandiose $1.9 trillion COVID-19 relief package, with the majority of American households receiving thousands of dollars in direct support from the federal government. Tom Siomades, chief investment officer at AE Wealth Management, believes the stimulus was excessive, given the overall financial situation of US households. Speaking to Cointelegraph, he remarked:

“The $1.9 trillion CARES Act in March, when Americans were already saving at a 20% rate, put more money into the economy than it could handle. This money has allowed people who would otherwise have returned to work to rethink their options. This created a labor shortage, which in turn led to a demand for higher wages, which led to higher costs and prices.

Some economists report a more subtle factor: an alarming exercise of pricing power by American companies. “Now producers know that people can pay more and will not be willing to accept lower prices for their products,” says Siomades.

Now that inflation has become a major political issue for the Democratic Party, all eyes are on the Federal Reserve’s efforts to address it. The wave of inflation should gradually fade, if not to pre-pandemic levels, at least to more moderate levels by the end of the year. Nonetheless, as rising prices become a growing public concern, private citizens and investment professionals alike are beginning to seek a safe haven for their funds – and that’s where Bitcoin comes in.

Bitcoin as “new gold”

With each year Bitcoin and the cryptocurrency industry become more mainstream, the frequency of comparisons to gold in terms of reserve asset potential multiplies. Many observers suggest that Bitcoin might even be more attractive than the precious metal in this regard. In November 2021, the preeminent cryptocurrency was up 133% year-over-year compared to just 4% for gold.

As observed by Milton “Todd” Ault, III, founder and executive chairman of investment firm BitNile Holdings, over the past 13 years Bitcoin has massively outpaced US inflation thanks in large part to the deflationary properties of the currency. ‘active. Ault commented to Cointelegraph:

“What makes it an excellent store of value and hedge against inflation is: there is a cost associated with operating it; there will only be $21 million worth of Bitcoin. This means there is a finite amount of Bitcoin to be mined […] Really, it’s still a standard hedge that people traditionally think of; supply is limited, and even in the current financial climate, it will continue to be in demand.

Unlike gold, Bitcoin lacks the key characteristics of a predictable, low-volatility asset. Perhaps this isn’t as much of a problem for a loyal diamond-handed hodler who believes in Bitcoin’s ultimate monetary dominance as it is for someone who has invested a significant portion of his personal savings as a shield against inflation. , the unpredictability could be unnerving. In a sense, Bitcoin’s price swings stand in stark contrast to the relative stability of gold, which serves not as a wealth multiplier, but as a preserver of purchasing power.

“In theory, Bitcoin should be a good hedge against inflation, as the supply of tokens that can be mined is limited. This creates a form of scarcity, which could help it hold its value over time against currencies. trustees,” Katie Brockman, an analyst at investment advisory firm The Motley Fool, told Cointelegraph. However, Bitcoin can only be a store of value if a significant number of people find it valuable. Brockman added:

“It does not appear that Bitcoin has reached this stage. As inflation has soared, the price of Bitcoin has fallen in recent months. It has also fallen at roughly the same rate as meme tokens like Dogecoin, suggesting that many investors view Bitcoin as just a cryptocurrency rather than a store of value.

However, just because Bitcoin is an imperfect hedge against inflation right now doesn’t mean it will ever be a dominant store of value. But if the currency is to become inflation proof, it will need to gain both wide acceptance and a solid reputation with the general public.

Coverage over time

Bitcoin’s status will also depend on how investors choose to use it. If people are holding their BTC bags as an inflation hedge, they may not be subject to the same cycles of volatility as the stock markets. But if most investors trade Bitcoin as they would stocks, the price of the asset could be more correlated to market fluctuations.

The future looks bright for the top cryptocurrency, although the timeline is less clear. Ault thinks the volatility could stop at the price of around $2 million per BTC. He added:

“In the process, Bitcoin is expected to become a multi-trillion dollar asset class. That doesn’t make it a straight hedge, but rather a time hedge.

One issue that may become more pronounced in the future is the uneven distribution of crypto wealth. As interest in BTC increases in waves and the cost of entry to investing rises rapidly, it is inevitable that large parts of its monetary stock will be concentrated in a limited number of wallets.

This brings us to the bitcoin paradox. It seems that to become the “new gold” in terms of conservative inflation hedging, the original cryptocurrency must move beyond its speculative appeal and become a widely (and perhaps more evenly) dispersed mass of money. A strong regulatory framework for crypto is one thing that could certainly help the asset class achieve these goals.