Rethinking the power of Bitcoin as an inflation hedge - TechCrunch

Rethinking the power of Bitcoin as an inflation hedge

From turkeys to gasoline, clothing to dollar stores, almost every avenue of human activity has been hit by the boom of inflation. Across the globe, rising inflation rates are hampering buying and spending plans.

Despite this inflationary inferno, consumers and institutions with fiat valueless money are seeking alternatives to hedging against it. Bitcoin and many other cryptocurrencies are currently their favorite weapons, leading the U.S. Securities and Exchange Commission to adopt crypto as an investment asset class.

Bitcoin has been seeing strong yields all year, surpassing traditional hedges by accumulating more than 130% compared to the gold minimum of 4%. In addition, increased institutional adoption, a steady desire for digital assets based on weekly inflows and increased media visibility strengthened the bitcoin issue among tired investors.

If these are the moves made with big money, they need to be smart moves. However, while the appearance of a hedge against bitcoin may be attractive to retail investors, there are still some question marks about its potential in reducing financial risk for individuals. .

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    Unnumbered eyes

    The ongoing debate over bitcoin as an inflation hedge must be preceded by the fact that the currency is often prone to market spying and gyrations: the value of Bitcoin fell over 80% in December 2017, by 50 % in March 2020 and with another 53% in May 2021.

    The ability of Bitcoin to improve consumer products and reduce volatility in the long run has not yet been proven. Traditional hedges like gold have shown effectiveness in retaining purchasing power in times of persistently high inflation - take the U.S. in the 1970s for example - something bitcoin has yet to prove. This heightened risk, in turn, leaves yields dependent on the large short-term movements that sometimes affect the currency frontier.

    It is far too early to judge bitcoin as an effective hedge.

    Many make the argument for bitcoin based on the fact that it is designed for limited supply, which apparently protects it from depreciation compared to traditional fiat currencies. While this makes sense in theory, it has been shown that the price of bitcoin is prone to external influences. Bitcoin “whales” are notorious for their ability to manipulate prices by selling or buying in large quantities, meaning that bitcoin can be controlled by speculative forces, not just on the supply rule.

    Another key consideration is regulation: Bitcoin and other cryptocurrencies remain at the mercy of regulators and different laws across jurisdictions. Anti-competition laws and overview rules could severely hamper the adoption of the underlying technology, which could further reduce the price of the asset. All of this to say one thing: It is far too early to judge bitcoins as an effective hedge.

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    Serving the rich

    Against the background of this debate, another particular movement has been leading its movement. As the bitcoin market grows, it continues to lead the adoption and institutionalization of money among buyers, including a number of wealthy individuals and corporations.

    A recent survey found that 72% of UK financial advisers have informed their clients about investing in crypto, with nearly half of advisers saying they thought crypto could be used to multiply packages as unrelated assets.

    There has also been a lot of bitcoin claims from individuals, who are known for being technologically advanced, namely Wall Street billion investor Paul Tudor, Twitter CEO Jack Dorsey, Winklevoss twins and Mike Novogratz. Even powerful companies such as Goldman Sachs and Morgan Stanley have expressed interest in bitcoin as a viable asset.

    If this trend continues, bitcoin 's infamous volatility will gradually dissipate as more and more affluent people and institutions hold the currency. Ironically, this accumulation of value on the network would lead to wealth accumulation - the antithesis for what bitcoin was created for, subject to the influence of the elite and a 1% ban.

    In line with classical schools of financial thinking, this would actually put retail investors at greater risk, since institutional buying and selling would be similar to a whale-like market manipulation.

    Challenging the basic spirit

    There is no doubt that the popularity of Bitcoin will lead to more people owning it, and it can be argued that the people with the most money are the ones who are (usually) the ones who own it. most of it.

    This apparent shift of influence towards high net worth individuals and companies among bitcoin and other crypto circles goes against the very philosophy on which the Bitcoin white paper was based when he described peer-to-peer electronic money system.

    The fundamental fundamentals for cryptocurrencies include their need to be unlicensed and to oppose censorship and control by any particular institution.

    Now, as the 1% are looking for a bigger slice of the crypto piece, they will be raising the prices of those assets in the short term in a way that investors cannot sell traditional and less influential. .

    While this move would undoubtedly make it a little richer, there is an argument to be made that this could leave the market at the mercy of the 1%, contrary to the Bitcoin outlook.

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