Why Bitcoin Has Been Unsuccessful as a Hedge Versus Elevated Inflation

Bitcoin’s value has plummeted this year, undermining the frequently made argument by cryptocurrency advocates that it can be an appropriate hedge fund versus elevated inflation throughout periods of economic upheaval.

Furthermore, Bitcoin supporters have consistently claimed that the currency’s limited supply would safeguard its cost throughout periods of elevated inflation. As opposed to centralized institutions, who may elevate the amount of money supplied, coins have a limited supply, which tends to keep them rare.

Well prior to the industry collapse, there was speculation about whether Bitcoin would retain its price point. Mega-rich investment expert Paul Jones believes Bitcoin could be used to hedge against inflation, whereas the owner of the Dallas Mavericks and all-round investment/business superstar Mark Cuban dismisses the concept as an advertising tactic.

An alternate perspective is that, like gold, Bitcoin and other similar virtual currencies may have an inherent price storing ability as they gain acceptance. Advocates think it would be viewed as a long-term asset that would not depreciate.

However, this still is yet to be confirmed. The total market cap of the crypto industry has fallen in tandem with inflationary pressures, with Bitcoin having lost 50% of its cap from the beginning of the year. As per Coin Metrics, the value of Bitcoin on Friday was $21,833.

Because of the degree of volatility related to price in crypto, it’s difficult to see it as a fixed-term store of its price. This is the opinion of Anjali Jariwala, verified financial analyst and planner, as well as the creator of Fit Advisors.

According to Jariwala, cryptocurrency is a novel asset class that does not yet operate as a valuable commodity such as precious metals or even as conventional currency as it cannot be conveniently traded for a service or product. Despite its lack of supply, the cost of a crypto coin such as Ether or Bitcoin is generally heavily influenced by consumer sentiment, according to her.

It’s complicated because it’s supposed to function as a currency, is taxed as property, and some individuals are comparing it to commodities.

Another factor to consider is that cryptos such as Bitcoin were only conceptualized a little more than a decade ago. As a result, there isn’t enough historical record in terms of statistics to fully comprehend what point it serves as an asset, according to Jariwala.

While cryptocurrencies such as Bitcoin have not been confirmed to be a credible, fixed-term value store, they may find acceptance and become more stable over time, according to Omid Malekan, blockchain innovation and crypto associate professor at Columbia Business School.

Once volatility settles, we would have a clearer understanding of the manner in which it reacts to macro-environmental factors, such as the level of increased inflation or what the Treasury Department is engineering, he suggests, cautioning that present virtual currency costs could represent a variety of factors other than inflation, such as too many heavily leveraged crypto exchange lenders or too little legislative regulation.

In any case, cryptocurrency continues to be a significant volatile investment. Jariwala advises only looking to invest with money you’re willing to see vanish. She also advises thinking of blockchain investments as a long strategic approach and sticking to it even in difficult times.

Additional Thoughts

Many experts and enthusiasts have made a wide variety of different claims and allegations regarding Bitcoin and other popular crypto coins over the years. It is important to take a lot of this information with a pinch of salt as many people’s views seem to be tied to their own personal investment or stake in these virtual currencies.

However, one thing is for certain, and that is the value of these virtual currencies. The way that the value of these coins has been affected by real-world events is something tangible that crypto investors can learn from. We have all seen how recent developments in the macro-economic environment have impacted these coins.

The Bottom Line

Due to Bitcoin being so heavily affected by the slew of external factors that have also affected many other markets, it is safe to say that cryptocurrency is not an effective hedge against inflation. This may change in the future; however, for now, this does not seem to be the case at all.

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Author: Jason Donaldson