Not only is the dilution of Bitcoin much less aggressive than USD over the last six years, it’s also much more consistent, not susceptible to political whims and, of course, predictable.
Economists with Bloomberg Economics estimate that roughly half of Bitcoin’s recent returns can be explained by inflation fears, with the other half coming from market exuberance and momentum trading. “Our model shows that for Bitcoin, the importance of inflation and hedging against uncertainty become more important drivers over time, accounting for 50% of price moves in the latest cycle relative to 20% in 2017.
Bitcoin-as-an-inflation-hedge arguments have been around since the token was created in 2009 following the great economic recession. The premise has gained momentum as prices on everything from food to gas to housing have advanced faster and been stickier over the past few months than many economists had anticipated. Wednesday’s data showed U.S. consumer prices rose last month at the fastest annual pace since 1990, in effect cementing high inflation as a hallmark of the pandemic recovery.
Many notable Wall Street investors and analysts have bought into the idea of using cryptocurrencies as a hedge against rising prices. Veteran hedge fund manager Paul Tudor Jones has said in the past that he likes it as a store of wealth. Meanwhile, MicroStrategy Inc.’s Michael Saylor said the Federal Reserve’s relaxing of its inflation policy helped convince him to invest the enterprise-software maker’s cash into Bitcoin.
“Bitcoin’s programmed predictability contrasts it from the uncertain policy decisions that impact the dollar.”
But there are plenty of counter-arguments too, most notably that Bitcoin hasn’t been in existence long enough to establish it can for sure act as a hedge amid rising prices.
Bitcoin might hold its value over the very long run. In his research on gold, Harvey found that it has held its value well for millenniums. But he also found that it’s prone to manias and crashes over shorter periods.
“Investors need to be cautious if they’re thinking that an allocation to Bitcoin will provide short-term inflation protection because we know if inflation goes up unexpectedly that that’s bad for equities, and if something’s bad for equities, that could lead to a risk-off trade.”
Lastly, Bitcoin doesn’t behave like it’s decoupled from everything else in the economy. “It behaves like a speculative asset”. It was cited at the coin’s drop in March 2020, when it lost roughly half its value amid a plunge in U.S. stocks.
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