From turkeys to gasoline, from clothing to dollar stores, nearly every avenue of human activity has been hit by the specter of inflation. Around the world, rising inflation rates are hampering purchasing and spending plans.
Faced with this inflationary hell, consumers and institutions that hold devalued fiat money have been looking for alternatives to protect themselves. Bitcoin and many other cryptocurrencies are the current weapons of choice, leading the US Securities and Exchange Commission to adopt cryptocurrency as a investable asset class.
Bitcoin witnessed strong returns in the year, overcoming traditional hedges by rally more than 130% compared to a meager 4% for gold. In addition, increased institutional adoption, sustained appetite for digital assets based on weekly entries and growing media exposure has strengthened the case for bitcoin among jaded investors.
If these are moves that are being made for a lot of money, they must be smart moves. However, while the prospect of bitcoin protection may seem attractive to retail investors, some question marks remain about its viability in mitigating financial risk for individuals.
Miscalculated expectations
The ongoing discussion of bitcoin as an inflation hedge needs to be preceded by the fact that the currency is often susceptible to fluctuations and fluctuations in the market: the value of Bitcoin plummeted more than 80% in December 2017, 50% in March 2020 and on the other 53% in May 2021.
Bitcoin’s ability to improve user returns and reduce long-term volatility remains unproven. Traditional hedges like gold have demonstrated effectiveness on preserving purchasing power during periods of sustained high inflation — see US during the 1970s as an example – something bitcoin has not yet been tested on. This heightened risk, in turn, makes returns subject to the drastic short-term swings that sometimes affect the currency.
It’s too early to make judgments about bitcoin being an effective hedge.
Many defend bitcoin on the grounds that it was designed for limited supply, which supposedly protects it from devaluation compared to traditional fiat currencies. While this makes sense in theory, the price of bitcoin has been shown to be vulnerable to outside influences. Bitcoin “whales” are known for their ability to manipulate prices by selling or buying in large quantities, which means that bitcoin can be dictated by speculative forces, not just the money supply rule.
Another important consideration is regulation: Bitcoin and other cryptocurrencies are still at the mercy of regulators and laws that vary widely across jurisdictions. Anti-competitive laws and short-sighted regulations can significantly hamper the adoption of the underlying technology, potentially further depressing the asset’s price. All of this is to say one thing: it’s too early to make judgments about bitcoin being an effective hedge.
Service to the rich
Against the background of this debate, another striking trend has been driving its momentum. As bitcoin’s popularity grows, it continues to drive the adoption and institutionalization of the currency among consumers, including many wealthy individuals and corporations.
A recent survey found that 72% of UK financial advisers informed their clients about investing in cryptocurrencies, with nearly half of advisers saying they believe cryptocurrency could be used to diversify portfolios as an uncorrelated asset.
There was also much advocacy for bitcoin from prolific individuals known to be technologically progressive, like the billionaire Wall Street investor. Paulo Tudor, Twitter CEO jack dorsey, the winklevoss twins and Mike Novogratz. Even powerful companies like Goldman Sachs and Morgan Stanley expressed their interest in bitcoin as a viable asset.
If that moment continues, bitcoin’s infamous volatility will gradually dissipate as more and more wealthy people and institutions own the currency. Ironically, this accumulation of value on the web would lead to concentration of wealth – the antithesis of what bitcoin was created, subject to elite influence and exclusive 1%.
According to classical schools of financial thought, this would actually expose retail investors to greater risk, as institutional buying and selling would resemble whale-like market manipulations.
challenging the core ethos
Bitcoin’s growing popularity will no doubt drive more people to own it, and it could be argued that the people with the most money will be the ones who (as usual) will end up owning the most of it.
This noticeable shift in influence towards ultra high net worth individuals and companies between bitcoin and other cryptocurrency circles runs counter to the very ethos that the Bitcoin white paper was based on when describing a point to point electronic money system.
Between the rationale for cryptocurrencies is the need to not have permission and censorship resistant and control by any institution.
Now, as the 1% seeks a bigger slice of the cryptographic pie, they raise the prices of these assets in the short term in ways that traditional and less influential retail investors cannot.
While this move will undoubtedly make some 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.