Yes, inflation is critical, but is Bitcoin the best bet for hedging
Does a difficult reality await those who are hedging their bets on Bitcoin?
The long-term objective of the Federal Reserve is to keep the inflation rate under 2%. However, according to the latest CPI data, the time series of inflation numbers hasn’t exactly been favorable.
With Bitcoin appreciatingl in 2021, there are markets that believe digital assets will improve the purchasing power of individuals. However, will it?
According to Ecoinometrics, the inflation numbers over the past 6 months were 2.6% (March), 4.2% (April), 4.9% (May), 5.3% (June), 5.3% (July), and 5.2% (August).
So, the expected target set by the Federal Reserve has barely been met. With time, the transitory period of high inflation will only get worse. What’s worse, the general public is already getting a little anxious about it too. A majority of the population believes the inflation rate will continue to stay above 5% in a year. And, the rising cost of living is hardly going to come back down, regardless of the Fed’s targets. Simply put, consumers worry that they are going to lose their purchasing power.
These people may start investing in assets that will help them retain their capital value. With Gold yielding negative returns over the past year, Bitcoin can enter the fray as an ‘attainable’ savior.
Any credible store of value asset has strong intrinsic value. Over time, Bitcoin’s intrinsic value has been slowly proven and understood.
However, BTC’S intrinsic value hasn’t developed enough to bear the U.S economy. BTC’s value has surged quicker than any other asset but the credibility of any asset’s intrinsic value is developed over time. Here, it is also important to understand that Bitcoin should not be analyzed using the same parameters of currencies either.
Large investors or whales are entering the space from an SoV perspective, and adoption will properly improve on the basis of that narrative.
Now, if Bitcoin is expected to be a strong hedge against inflation by next year or the year after, investors may see themselves heading towards a difficult reality.
The monetary base of the U.S dollar is $20 trillion while BTC’s was around $820 billion, at press time. The likelihood of Bitcoin saving a crashing market is minimal because capital inflows will not be able to meet the outflows.
Before BTC is expected to match the U.S dollar, its market cap has to reach at least half of the dollar’s. Ergo, Bitcoin is not the answer. Not yet.