Is Bitcoin a hedge against inflation? This is the question that usually divides the room because people normally have mixed opinions on this matter. Over the years, the performance of this cryptocurrency has proved both sides correct at some point.
So far, no amount of experience or expertise has yielded the correct answer to the underlying question. The sudden swings of BTC in between the pre- and post-pandemic landscapes had just raised more questions than concrete answers about the subject. In this article, we will weigh in on the matter to help you arrive at an answer yourself.
The Current Status of BTC
Bitcoin shot up its value in 2021, surpassing 65,000 USD in November of that year, which was beyond market expectations. The surge was largely attributed to events such as Tesla’s purchase of 1.5 billion worth of BTCs combined with Elon Musk’s support of the crypto, the USA’s approval of exchange-traded funds (ETFs), and the influx of retail investors.
However, the crypto saw a massive plunge going to 2022 due to a massive sell-off by Tesla, Musk withdrawing his support for it, and the looming delegalization of the coin in China. A consequent drop followed, which settled around the 15,000 USD mark that year. It’s only now that BTC is once again recovering wherein it is already trading at around 22,800 USD as of writing.
What the Yaysayers Say
Since its inception, Bitcoin has been touted to be a strong inflation hedge due to its easy access, predictable supply, and decentralized nature. This is the reason why it has been likened to gold over the years and has made itself an alternative to this precious metal.
Like gold, cryptocurrencies like BTC are truly unique. They lack a single governing body and their finite supply makes them an inherently valuable asset that appreciates over time in theory.
With the integration of the proof-of-work concept in Bitcoin, users have access to their coins at all times making it very secure. Meanwhile, the number of interested buyers and sellers in the system drives its liquidity.
These benefits appear as solutions for inflation in traditional monetary systems but they clearly still require some further fine-tuning.
What the Naysayers Say
Analysts warn that although cryptos such as Bitcoin show signs of being an inflation hedge, they’re not quite there yet. While it could be treated as a hedge, it comes with plenty of hassles.
Although BTC is slowly showing signs of recovery now, CNBC MadMoney host Jim Cramer and others are not buying it and are advising everyone to buy gold instead. Unlike Bitcoin, which was only introduced in 2009, gold has proven its mettle against inflation since time immemorial. It has successfully held its value amid economic uncertainties over the years, and this was once again proven during the onslaught of the COVID-19 pandemic when every business came to a halt at some point.
Furthermore, there’s the fact that BTC was stripped down of its value by nearly 70% in the year that just ended, which overtook inflation rates. Likewise, people, especially retail investors, have been holding, buying, and selling cryptos as they would with stocks. These are all indications that Bitcoin makes a poor hedge at the moment contrary to what its fans would want to believe.
Bitcoin remains by far the most established and the oldest successful crypto in the world. Therefore, its utility and worth cannot be discounted. There have been times that it has shown resilience over economic uncertainties but there have been times wherein it has also folded amid the tension.
So, is BTC a strong hedge against inflation? With the way it is behaving as of late, it’s not quite there yet, but it could be when the right market conditions arise in the future.
Giancarlo is an economist and researcher by profession. Prior to his addition to Blockzeit’s dynamic team, he was handling several crypto projects for both the government and private sectors as a Project Manager for a consultancy firm.