Is Bitcoin Still A Good Inflation Hedge?

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  1. Fed raises rates by half a percentage point - the biggest hike in two decades - to fight inflation
  2. Crypto isn't a safe haven during high inflation
  3. Bitcoin Isn't an Inflation Hedge Yet, but Here's How It Could Be
  4. Do Regulations Ensure Safety of Cryptocurrencies?
  5. Finance Reframed 💵
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Inflation reached record highs in March 2022. This is the highest that it has ever been in 40 years.

Therefore, to combat it, the U.S. Federal Reserve decided to take action by increasing the interest rate by half a percentage point, aka 50 basis points.

In addition, Jerome Powell announced that inflation is much too high to burden lower-income individuals as prices continue to skyrocket.

Do We Need Inflation?

Inflation is a good thing as it motivates income and economic growth. In addition, it shows that there is increased demand and thus spurs innovation and production.

However, when inflation is uncontrolled and increases rapidly, it causes more bad than good.

In March 2022, inflation reached a record high of 8.5%, a four-decade high.

What would you expect as the consequences of months of low-interest rates and money printing?

Not to mention the other factors involved like the war in Ukraine that pushed oil prices up, the tightening supply chains due to China’s insane ‘zero-COVID’ strategy and protectionist policies like Indonesia’s ban on palm oil exports.

The Fed is in a very tight spot. The Fed can increase interest rates to break the back of inflation, but at the same time, they risk triggering a recession.

Thus, the markets have reacted by selling off in light of possible further rate hikes.

The crypto markets reacted similarly. Bitcoin, once thought to act independently of the stock market, seems to mirror the price action of tech stocks. In the past few weeks, Bitcoin has consistently headed in a downward trend. Currently, it is changing hands at about $36,000 per BTC.

Thus, this begs whether cryptocurrencies will be a good hedge against inflation?

Bitcoin, also known as digital gold, is described as a deflationary asset as there is a limited supply.

Therefore, what is expected is for the price of Bitcoin to rise while inflation increases. However, that seems not to be the case.

So Who’s To Blame?

The Crypto market’s bull run occurred amidst the pandemic. As the Fed began to print money and give out stimulus checks, money entered the crypto market.

As a result, people started buying bitcoin and other altcoins like Ethereum, driving prices up.

However, as the world moved past the pandemic era, increased consumer demand contributed to the rise in inflation. Institutional investors may be blamed for the tangle.

Institutional investors tightly linked to the traditional financial markets could have caused the failure of bitcoin as an inflation hedge.

As the Fed tightens monetary policy, it becomes more expensive to borrow money. Financial institutions may then opt for safer assets.

The uncertainty of the markets propelled this sell-off further with possible fears of a recession. Furthermore, some might take this opportunity to cover their losses in other asset classes.

What Needs To Be Done?

According to Coindesk, the market has to mature for Bitcoin to be a genuine store of value. This means that there need to be significant long-term investors that will weather market volatility and price drops.

These ‘hodlers’ will provide stability for the asset. Other factors that have to happen include common frameworks for treating crypto. This comes with regulations and acceptance of this new asset class.

I have discussed this in a previous article:

Conclusion

Cryptocurrency is a volatile asset class, and it will continue to be in the near future. Like a hormone-driven teenager, cryptocurrency still struggles to find its place in the market.

It might not play a role as an inflation hedge, and the promise of universal utility may still have some ways to go.

Who knows what will be the final form of this asset class as it continues to evolve over the years.

I will continue to buy the dip just because of its prospects as an asset class.

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