From turkeys to gasoline, clothes to dollar stores, almost all human activity has been hit 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 holding devalued fiat currency have sought alternatives to protect themselves. Bitcoin and many other cryptocurrencies are the current weapons of choice, pushing the United States Securities and Exchange Commission to adopt crypto as a investable asset class.
Bitcoin has witnessed strong returns since the start of the year, surpassing traditional hedges by rallying more than 130% compared to the meager 4% of gold. In addition, increased institutional adoption, a sustained appetite for digital assets based on weekly entries and growing media exposure has reinforced the case for bitcoin among weary investors.
If these are moves made by a lot of money, they must be smart moves. However, while the prospect of hedging against bitcoin may seem appealing to retail investors, some question marks remain as to its viability in mitigating financial risk for individuals.
Badly calculated expectations
The ongoing discussion of bitcoin as an inflation hedge must be preceded by the fact that the currency is often sensitive to fluctuations and fluctuations in the market: Bitcoin’s value fell by over 80% in December 2017, in 50% in March 2020 and by another 53% in May 2021.
Bitcoin’s ability to improve user returns and reduce long-term volatility has yet to be proven. Traditional hedges like gold have proven effectiveness to preserve purchasing power during periods of sustained high inflation – take the United States during the 1970s for example, something on bitcoin has yet to be tested. This increased risk, in turn, subjects returns to the drastic short-term fluctuations that sometimes affect the currency.
It is far too early to judge bitcoin as an effective hedge.
Many argue in favor of bitcoin on the basis that it is designed for a limited supply, which supposedly protects it from devaluation against traditional fiat currencies. While this makes sense in theory, the price of bitcoin has proven to be vulnerable to external influences. Bitcoin’s “whales” are known for their ability to manipulate prices by selling or buying in large quantities, which means that bitcoin can be driven by speculative forces, and not just by the rule of supply of money. silver.
Another key consideration is regulation: Bitcoin and other cryptocurrencies are always at the mercy of regulators and laws vary widely across jurisdictions. Short-sighted anti-competitive laws and regulations could significantly hamper adoption of the underlying technology, potentially leading to further depreciation in the price of the asset. All of this to say one thing: it is far too early to judge that bitcoin is an effective hedge.
Catering for the rich
In the context of this debate, another striking trend has been driving its momentum. As the popularity of bitcoin increases, it continues to drive the adoption and institutionalization of the currency among consumers, including many high net worth individuals and businesses.
A recent survey found that 72% of UK financial advisers informed their clients about investing in crypto, with nearly half of advisers saying they believed crypto could be used to diversify portfolios as an uncorrelated asset.
There has also been a lot of advocacy over bitcoin from prolific individuals known to be technologically progressive – the billionaire Wall Street investor. Paul Tudor, CEO of Twitter Jack Dorsey, the 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 momentum continues, bitcoin’s infamous volatility will gradually dissipate as more wealthy people and institutions hold the currency. Ironically, this accumulation of value on the network would lead to the concentration of wealth – the antithesis of why bitcoin was created, subject to elite influence and exclusive. 1%.
Consistent with conventional schools of financial thought, this would actually put retail investors at greater risk, as institutional buying and selling would resemble whale-like market manipulation.
Challenge basic ethics
The growing popularity of Bitcoin will undoubtedly lead to more people in its possession, and it can be argued that the people with the most money will be the ones who (as usual) end up owning most of it.
This noticeable shift in influence towards very high net worth individuals and companies among Bitcoin and other crypto circles goes against the very ethics on which the Bitcoin whitepaper was based when it described a peer-to-peer electronic payment system.
Now, as the 1% seek a bigger slice of the crypto pie, they are raising the prices of these short-term assets in ways that traditional and less influential retail investors are unable to do.
While this move will undoubtedly make a few richer, there is an argument to be made that it could leave the market at the mercy of the 1%, contradicting Bitcoin’s intended view.