Bitcoin yet to prove inflation hedge status, but the time may come soon

The narrative surrounding Bitcoin (BTC), for years, has been that the digital asset is a hedge against inflation. Inflation figures have been rising across the board in the past two years due to governments printing large amounts of local fiat assets to combat the financial devastation caused the COVID-19 pandemic.

For perspective, the stimulus plan of President Biden has increased America’s debt relief to $5 trillion since the outbreak of the virus in January. You can also visualize the enormity of these numbers by looking at the fact that the Federal Reserve has issued over 40% of all USD currently in existence during 2020.

While it may seem that this data was favorable for Bitcoin, and may have helped to increase its value as a tangible, long-term store, many people around the world believe so. However, Chainalysis’ recent report seems to indicate that Bitcoin may not be the inflation hedge many initially believed. Kim Grauer, Chainalysis’ head for research, stated that this is an interesting topic.

“We can’t prove a statistically significant correlation between Bitcoin prices and inflation in the U.S., but we do know that Bitcoin is a popular way to hedge against inflation.

This is just the beginning of the discussion.

It is not set in stone

The topic of inflation continues to be a hot topic. This is evident by the fact the PCE index, which serves as an indicator of American consumers’ spending power, revealed earlier this year that the PCE index, which measures inflation, was at its highest level in more than a decade.

Cointelegraph spoke to Bobby Zagotta, CEO at Bitstamp U.S. to gain a better understanding about whether BTC’s perceived value as an inflation hedge is fading. He stated that Bitcoin and crypto have become an entire asset class beyond any discussion about whether it’s merely a hedge.

Cointelegraph spoke with Matt Luczynski CEO of HooDooi.com, a multi-chain NFT marketplace. He said that Bitcoin is an excellent long-term asset when you consider the economic structure that underlies traditional banking.

“It [Bitcoin] offers more value, stability, and security than any existing centralized government-backed currency/asset. While there are certain early adopters who have a monopoly on the market’s price action, it will eventually fall as supply becomes more decentralized and more people take control.

He did admit that the digital asset needs to be more prominent as a store or hedge. “It [Bitcoin] has been on the right path and is moving in the right direction. Luczynski concluded by saying that it was a long-term investment.

A closer look at anti-hedge arguments

Iqbal Gandham (Vice President of Transactions and Payments at Ledger) told Cointelegraph that he doesn’t see Bitcoin as an investor’s primary investment against local fiat devaluation.

However, it is possible that this narrative could change in a significant way, but it could take several years. “BTC [Bitcoin] must align with inflation and reduce price volatility to become a long-term value store. This will only happen if adoption rises and the price finds new norms.

Anton Bukov, cofounder of 1inch Network’s decentralized exchange aggregator, provided a more comprehensive view. He said that cryptocurrency continues to be a very risky asset class. Many specialists as well as ordinary investors remain uncertain about the future of the industry.

Bukov believes, however, that Bitcoin has enough potential to be an SOV for many people in the future, thanks to a growing user base and the emergence of institutional investors.

“Bitcoin has been an integral part of modern society for almost 13 years. BTC will continue to be a ‘digital gold,’ according to me. There are currently more than 56 USD millionaires who own 21 million BTC. It is therefore almost impossible for me to believe that BTC will lose its status as a store-of-value.
All about the long-term strategy

Nicholas Merten, CEO and founder of DataDash YouTube channel and financial platform Digifox, stated that people often expect instant results when they criticize Bitcoin’s store-of-value narrative.

He pointed out that, for example, the recent halvings of BTC — which occur every four years — have a price effect that most people believe is “factored in” before these events even happen. He said, “However, as we know, the market is treated with seismic rallies after a halving every single time.”

Merten also believes that inflation hedgers should take the time to choose which assets to invest their capital in. This decision-making process can often cause volatility and delay in asset prices. Merten added:

This is an excellent example of traditional market adjustment. The M3 Money supply adjusted the performance of S&P 500. It took the S&P 500 1 year and 5 month to revise its prior valuation adjusted for inflation. Does this mean that equities are not able to store value? My opinion is that equities outperform holding dollars in a bank.

Looking ahead

Although the United States’ inflation numbers look grim at the moment, it is important to remember that other smaller countries like Zimbabwe and Venezuela have been the recipients of monetary devaluation numbers that are just unfathomable.

Related: Bitcoin’s declining returns: Does it outperform altcoins in terms of performance?

Venezuela, for instance, experienced an inflation rise of 10,000,000% in 2019, rendering its local currency, Bolivar, nearly useless. According to reports, interest in digital assets was growing in tandem with the rise in inflation numbers.

Grauer stated that cryptocurrencies are used as a way to store value in countries like Nigeria and Venezuela that have suffered from currency inflation or devaluation.

Even though Bitcoin’s fixed supply narrative continues proving that the digital currency can be considered a valuable store of value, events like May’s cross-market crash have cast doubt on that narrative. It will be interesting to see whether Bitcoin can take its own path without the interference of stocks and other assets.

https://cointelegraph.com/news/bitcoin-yet-to-prove-inflation-hedge-status-but-the-time-may-come-soon