Is bitcoin really a hedge against inflation?

Bitcoin is off to a rough start this year. From record highs of more than $65,000 for each token in November, it slumped to around $42,000 yesterday; bitcoin actually briefly dipped below $40,000 early this week. And the slide is happening amid another troubling trend: Prices are climbing. The forecasted rise in the consumer price index recently hit 7%.

That has turned the spotlight on a key question about crypto: Isn’t bitcoin supposed to be a hedge against inflation, a place to put your money when prices are soaring and traditional money is losing value?

It’s important to remember that these assets are risky. That’s what the recent sell-off is telling us about bitcoin and crypto. “Crypto is a risk asset … This is a reminder that that’s true,” Matt Hougan, chief investment officer of Bitwise, said yesterday.

• Risk assets take a hit when the economy appears headed toward rougher waters. Chris Kline, co-founder of Bitcoin IRA, pointed to “a sentiment of uncertainty across all markets as inflation proves itself not to be transitory and the Fed moves forward with possibly four rate hikes.”
• In fact, the Fed “shifting to a more hawkish stance” probably “sparked the recent sell off” in crypto, Hougan said.
• And besides, after a year of astounding growth, bitcoin and crypto were poised for a correction. These are “momentum plays” after all, said Lawrence Newhook, chief investment officer of Alpha Innovations, as he pointed to a “general malaise" plaguing crypto right now. “We've just had no momentum and no excitement” in crypto, he told me.

Given where it’s at, bitcoin can’t exactly be a hedge against inflation. At least not yet. “The idea that bitcoin is an inflation hedge is purely speculative,” CoinDesk columnist David Morris said last month.

• Now, “it may become true in the future,” when bitcoin gains wider acceptance, when “enough companies, economies and individuals transfer a lot of their wealth into bitcoin” which would make its price more stable, Morris added. But that’s not yet the case, despite bitcoin’s recent growth.
• It also depends on the type of inflation we’re dealing with. Bitcoin as an inflation hedge, Newhook of Alpha Innovations said, will likely be true in "hyperinflationary markets,” where the purchasing power of fiat currencies is getting decimated. He cited Turkey, which is reeling from a 36% inflation rate.
• But in countries like the U.S., it’s not likely that the current rate of inflation will be a factor in driving demand for cryptocurrencies. “I'm less and less optimistic about that,” he said.
• Mark Cuban weighed in with a different spin. He dismissed outright the view that bitcoin is an inflation hedge. “It’s not and never will be,” he tweeted, as he argued for his preferred crypto, dogecoin, which started as a joke. It’s now the 12th most valuable token. He called doge “good for spending and better than a lottery ticket,” a head-scratcher of a comment that sparked a heated Twitter debate.

It’s a long game. Despite the climbing prices, bitcoin actually did well, Kline pointed out. “Remember that the digital asset’s opening price for 2021 was around $28,000,” he said, “and finished well above that by the end of the year.”

— Benjamin Pimentel (email | twitter)

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