The Complicated Case of the Bitcoin Hedge ConceptDecember 14, 2021
Recently, the Bureau of Labor Statistics in the US showcases the updated data for the inflation-tracking CPI, or Consumer Price Index. It has shown that inflation in the US hit an annualized rate of 6.8 percent. That added up to the highest level of inflation in nearly 40 years, with the previous such level going back to 1982. No one needs a diploma in economics to understand that this is by no means a good development. It also adds further detractions from the Build Back Better, a huge social spending package that US president Joe Biden has been shaping as his major policy driver. At the same time, asset markets have also been reacting to this as well. Wall Street quickly managed to price in the same inflation, which is why the Dow Jones Industrial Average remained stable in the aftermath of the CPI report.
Gold did move somewhat upon the same news and the gold futures continued to have a decent, long-lasting upwards trajectory, which began with the rise of inflation fears. But, unlike actual gold, the digital gold of bitcoin and other cryptocurrencies did not react in this manner. It instead fell, with BTC token going down some 25 percent in the last 30-day period. Other digital currencies did not fare any better, including ethereum which should be in a growing position of decoupling with bitcoin, at least in theory. All of this contradicts completely the notion that bitcoin and crypto can act as an inflation hedge. In other words, they should be the asset that people and companies use when they want to put money away instead of allowing it to lose its real-world worth through inflation. But, the same thing is clearly not in the mind of traders and investors.
Ghost Inflation Rallies
The question is relatively simple here – what is happening that is not allowing bitcoin to rally as inflation in the biggest economy on the planet hits its highest value in four decades? The answer is not something many in the crypto analytics pop domain would appreciate sharing and it comes down to the notion that bitcoin is a hedge. According to all relevant parameters, the same concept is completely speculative. Of course, it has plenty of logical elements to it and this role might formalize further in the future, but right now, bitcoin or any other cryptocurrency does not show any rational reason to believe it is an active hedge against the movement of the traditional markets.
In other words, the mechanisms of gold price movement are lacking when it comes to crypto. Instead, time and time again in recent years, bitcoin ebbed and flowed with the rest of the traditional market. The crash from March 2020 is a perfect example, but other similar situations took place before and after that. In fact, there was no singular moment when the BTC token behaved as it should inside of the hedge narrative.
The possibility of bitcoin and other digital currencies becoming a hedge to the traditional market is open to future developments. In theory, if enough individuals, companies, and entire economies begin employing bitcoin and putting wealth into it, the same market cap will balloon, while taking other digital currencies with it as well. Along with that, the price of the same assets will become more stable and that should level them against the traditional markets. This way, they could act as an insurance policy for the classic market trials and tribulations, offering a new playing field that moves in the opposite direction when the gauge begins to drop in the traditional market.
This is how most investors employ gold and have been doing the same for decades. But, with that alternative, the process of using bitcoin, in turn, loses some of its current appeals. That does not include just esports betting fans, cryptocurrency early adopters, and similar niche groups, but also the majority of overall current users. The same covers things like huge volatility, which actually provides chances for quick (or relatively quick) trades that generate profits. Without these, bitcoin basically becomes just one more tech stock that people can invest in and hope it grows in value over a prolonged period of time.
Digital Gold Difficulties
Even if for some reason a large number of users decided to adopt bitcoin and employ it in a similar fashion to gold, the numbers would need years to add up. According to some estimates, the number of current users of bitcoin would need to grow tenfold from the present levels. That means a level of first-time adoption that is basically unprecedented in the history of this digital currency. So, even if the ball started rolling in that direction, the time it would take to get there would be measured in decades. Thanks to that simple arithmetics, the concept of digital gold is not just practically nonexistent, but it would also need years and years to mature even under the ideal circumstances.
Cause and Effect
Underlining the entire problem of digital gold and bitcoin as a hedge for inflation is the notion that in finance and economics, cause and effect are very hard things to prove. Without the ability to take on controlled experiments, analysts and experts have to assess real-world situations and the things they see as variables. In this case, if nothing but inflation was taking place in the domain of finance, one could be able to assess how crypto is changing according to that.
But, inflation, even 40-year-highs, is not only happening in the world of international economics. Instead, like in any macroeconomics question, there are a huge number of moving parts and countless possible variables. No one can determine that there is no causation, but no one can underline any and point it out for sure as a factor. Because, in a week or month, the same scenario will occur again and almost certainly not result in the exact same outcome. But, for now, the concept of bitcoin and crypto as a hedge to inflation simply has no basis in financial reality.