From turkeys to gasoline to clothing to dollar stores, almost every avenue of human activity has been affected by the specter of inflation. Around the world, rising inflation rates are disrupting purchasing plans and spending.
Faced with this inflationary hell, consumers and institutions that have a devalued fiat currency have looked for alternatives to protect themselves. Bitcoin and many other cryptocurrencies are the current weapons of choice, leading the US Securities and Exchange Commission to adopt cryptocurrencies as an invertible asset class.
Bitcoin has seen strong returns so far this year, dwarfing traditional hedges by rising more than 130% compared to a meager 4% for gold. Additionally, increased institutional adoption, sustained appetite for digital assets based on weekly entries, and growing media exposure strengthened the case for bitcoin among weary investors.
If these are the moves that are making large amounts of money, they must be smart moves. However, while the prospect of hedging against bitcoin may seem tempting to retail investors, questions remain about its viability in mitigating financial risk for individuals.
The ongoing discussion of bitcoin as an inflation hedge must be preceded by the fact that the currency is often susceptible to market fluctuations and swings: Bitcoin’s value plummeted more than 80% during December 2017, down 50% in March 2020 and another 53% in May 2021.
Bitcoin’s ability to improve user profitability and reduce long-term volatility has yet to be proven. Traditional hedges such as gold have proven effective in preserving purchasing power during periods of sustained high inflation; Let’s take the example of the US during the 1970s, something that Bitcoin has yet to test itself on. This increased risk, in turn, makes returns subject to the drastic short-term swings that sometimes affect the currency.
It is too early to pass judgment on bitcoin as an effective hedge.
Many argue in favor of bitcoin based on the fact that it is designed for limited supply, supposedly protecting it from devaluation compared to traditional fiat currencies. While this makes sense in theory, the bitcoin price has been shown to be vulnerable to outside influences. Bitcoin’s “whales” are known for their ability to manipulate prices by selling or buying in bulk, which means that Bitcoin can be dictated by speculative forces, not just the rule of the money supply.
Another key consideration is regulation: Bitcoin and other cryptocurrencies are still at the mercy of regulators and laws that vary wildly across jurisdictions. Anti-competitive laws and shortsighted regulations could significantly hamper the adoption of the underlying technology, which could further depreciate the price of the asset. All of this is to say one thing: it is too early to pass judgment on bitcoin as an effective hedge.
Serving the rich
In the context of this debate, another prominent trend has been fueling its momentum. As bitcoin’s popularity grows, it continues to drive the currency’s adoption and institutionalization among consumers, including various wealthy individuals and corporations.
A recent survey found that 72% of UK financial advisers have informed their clients about investing in cryptocurrencies, and almost half of advisers said they believed that cryptocurrencies could be used to diversify portfolios as an uncorrelated asset. .
There has also been a huge promotion of bitcoin by prolific folks known to be technologically progressive, namely Wall Street billionaire investor Paul Tudor, Twitter CEO Jack Dorsey, the Winklevoss twins, and Mike Novogratz. Even powerful companies like Goldman Sachs and Morgan Stanley have expressed interest in bitcoin as a viable asset.
If this momentum continues, bitcoin’s infamous volatility will gradually dissipate as more and more wealthy individuals and institutions own the currency. Ironically, this accumulation of value on the network would lead to the concentration of wealth, the antithesis of what Bitcoin was created for, subject to the influence of the elite and the exclusive 1%.
According to classical financial schools of thought, this would actually expose retail investors to greater risk, as institutional buying and selling would resemble whale-like market manipulations.
Challenging the core spirit
The growing popularity of Bitcoin will undoubtedly lead to more people owning it, and it can be argued that the people with the most money will be the ones who (as usual) will end up owning the most.
This remarkable shift in influence towards ultra-high net worth individuals and companies between bitcoin and other crypto circles goes against the very spirit on which the Bitcoin white paper was based when it described a peer-to-peer electronic cash system.
Among the fundamental reasons for cryptocurrencies is their need not to have permission and to be resistant to censorship and control by any institution.
Now, as the 1% seek a larger slice of the crypto pie, they are raising the prices of these short-term assets in a way that traditional and less influential retail investors cannot.
While this move would undoubtedly make some richer, it can be argued that this could leave the market at the mercy of the 1%, contradicting Bitcoin’s intended vision.