Connect with us


Is Bitcoin a Reliable Inflation Hedge? (Study)



Is Bitcoin a Reliable Inflation Hedge? (Study)

Advertising Disclosure
This article/post contains references to products or services from one or more of our advertisers or partners. We may receive compensation when you click on links to those products or services

Inflation has reared its head in 2022. While experts have warned of inflation since the pandemic began, February 2022 saw inflation rise to 7.9%, and many think it’s here to stay. Economists expect inflation to exceed 3% through the end of 2023, according to a survey by the National Association of Business Economics.

As investors experience the pinch of a devalued U.S. dollar, many are seeking out investments that act as a hedge against inflation. And while traditional inflation hedges like gold or U.S. Treasury Bonds are still popular, Bitcoin is for the first time being touted as a viable alternative.

But has Bitcoin proven itself to be a reliable inflation hedge? What does the historical data show us? Let’s take a look.

The Short Version

  • An inflation hedge is an investment thought to protect against inflation.
  • Some of the more traditional hedges against inflation include gold and Treasury bonds. But some cypto enthusiasts think Bitcoin is also a good inflation hedge.
  • Unfortunately, the historical evidence is murky and Bitcoin’s price has fallen in 2022 even while inflation has skyrocketed.

What Is an Inflation Hedge?

An inflation hedge is an investment that is supposed to protect the decreased purchasing power of a currency due to rising inflation. Hedging against inflation involves investing in an asset that will hold its value while currencies continue to be devalued.

For example, gold has traditionally been considered an inflationary hedge. This is because it often increases in value as purchasing power declines.

Many crypto fans have claimed that Bitcoin is a better inflation hedge than other popular choices like gold. But is it really?

In Theory, Bitcoin Should Protect Against Inflation

The theory that Bitcoin could be a good inflation hedge isn’t entirely unfounded. Bitcoin’s limited supply is a hallmark feature of assets that have historically protected against inflation.

There are nearly 19 million Bitcoin mined, but there will only ever be 21 million. Satoshi Nakamoto intentionally designed the currency to be a finite resource, mimicking the finite supply of gold.

This finite, digital gold model has caused many crypto experts to argue that Bitcoin is a good hedge against inflation. Crypto fans claim that as the supply of USD increases, the number of Bitcoin does not.

As a result, the value of Bitcoin should increase in relation to the U.S. dollar over time. The theory is simple enough, but the math doesn’t always work.

In Practice, Bitcoin Has Been an Unreliable Inflation Hedge

While the theory we outlined above might make Bitcoin seem like a good inflation hedge, it’s essential to consider the actual behavior of this cryptocurrency. In practice, Bitcoin doesn’t reliably track inflation.

If you look at the price of Bitcoin after it exploded in popularity in 2017, there is a dramatic level of volatility. Even excluding the past two years of activity due to the pandemic, you can see that Bitcoin crashed in both 2018 and 2019, when inflation was relatively stable.

When comparing Bitcoin’s performance to the M2 money supply or gold (a traditional inflation hedge), Bitcoin’s performance is far less stable than gold.

Bitcoin Is Untested Against Inflation – Until Now

So we know that Bitcoin was volatile during low, stable inflation. But the fact is that Bitcoin has never truly been tested against any real inflation (not like gold during the 1970s). So now that inflation is rising (and is projected to stay high), how has Bitcoin performed?

The answer is not great. In the spring of 2021, inflation started its march upward in earnest.

Bitcoin had many ups and downs throughout the year. It ultimately dropped 18% relative to the dollar, while other risk assets like the S&P 500 stock index grew 8%. Even traditional inflation hedges like gold faired better, rising 7%.

Three months into 2022, the trend continues to be clear. Bitcoin is down in 2022, moving in exactly the opposite direction of inflation.

Bitcoin price chart

So while Bitcoin may seem like a good hedge against inflation during several specific periods, overall it hasn’t been correlated with inflation in any meaningful way.

Bitcoin Is Vulnerable to Regulation

A quick analysis of Bitcoin’s recent performance indicates that it’s a volatile option for an inflation hedge. And there are still other factors to consider.

In particular, Bitcoin’s lack of regulation makes it a risky choice as an inflation hedge. While the lack of cryptocurrency regulation is seen by many as a benefit, the decentralization of Bitcoin relative to other fiat currencies makes it extremely vulnerable.

Anti-competitive laws or regulations, even well-meaning ones, could completely derail Bitcoin’s widespread adoption as a currency. These types of regulatory changes could tank the currency overnight.

Find out more >>> What Is the Future of Bitcoin and Crypto Regulation?

Bitcoin Is Vulnerable to Market Manipulation

While crypto is often touted as a way to decentralize finance and redistribute wealth from the 1%, the reality is far from this egalitarian dream. Large amounts of Bitcoin are concentrated with individual holders. These Bitcoin “whales” can manipulate prices by buying or selling their Bitcoin in large quantities. Enough to influence the cryptocurrency’s price.

A forensic investigation conducted by the University of Texas and Ohio studied over 200 gigabytes of public transaction history between Bitcoin and Tether (a USD-backed cryptocurrency). It found that Bitcoin’s price boom in 2017 was entirely orchestrated by a single (and anonymous) market player. The market manipulation resulted in an all-time high price of $20,000.

This widespread manipulation points to Bitcoin’s price being largely dictated by speculation rather than the supply of coins as pro-inflation hedge theorists would have you believe.

Should You Buy Bitcoin to Hedge Against Inflation?

Bitcoin has become widely popular. Millions of retail investors are adding cryptocurrency to their portfolio. And the increase in cash and interest will keep the coin trading at new heights.

But when it comes to using Bitcoin as an inflation hedge, what does the (admittedly limited) data show?

Our verdict: Investors can’t presume any hard-fast correlation between inflation rates and Bitcoin’s price without more concrete trends.

Read more >>> Inflation Proof Investments

The Bottom Line

At this point, we consider crypto more akin to risky tech stocks than mature, stable inflation hedges like gold or U.S. Treasury bonds. But while we don’t think that Bitcoin is a reliable inflation hedge today, that’s not to say it won’t be one someday.

For that to happen, Bitcoin would need to become the “store of value” currency that theorists hope it will be. To achieve this status, Bitcoin will need to become more mainstream and significantly increase its market cap. Learn more about investing in Bitcoin here >>

Source link

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *


Sushiswap developers propose to divert 100% of fees generated to Sushi’s multisig



Sushiswap developers propose to divert 100% of fees generated to Sushi’s multisig

  • Sushiswap developers have submitted a new governance proposal to the community.

  • The proposal seeks to divert 100% of fees generated on the platform to Sushi’s multisig.

  • The funds would be used for Sushi’s multisig for a year or until new tokenomics are implemented.

Sushiswap developers want to divert trading fees

Developers of the decentralised finance (DeFi) protocol, Sushiswap, have submitted a new proposal to the community. According to the proposal, 100% of the fees generated on the platform would be diverted to Sushi’s multisig for one year or until new tokenomics are implemented.

This latest cryptocurrency news comes as Sushiswap is currently facing a significant deficit in its treasury. The deficit threatens the protocol’s long-term operational viability. 

In his proposal, the Head Chef, Jared Gray, said;

“After reviewing expenditures, it’s clear that a significant deficit in the Treasury threatens Sushi’s operational viability, requiring an immediate remedy. In my original proposal, Sushi operated with an annual runway of 9M USD. However, after my detailed review, we reduced that requirement to 5M USD. We made the reduction possible by renegotiating infrastructure contracts, scaling back underperforming or superfluous dependencies, and instituting a budget freeze on non-critical personnel and infrastructure.”

Despite reducing the project’s annual runway requirement from $9 million to $5 million, the treasury still provides for only about 18 months of runway.

The developers are now proposing to set up Kanpai, a fee-diversion protocol. The proposal, if accepted, will lead to 100% of fees diverted to the Treasury multisig for one year or until the project’s new token distribution and reward schemes become active. 

Sushiswap’s fee-diversion solution is temporary

The developers pointed out that the proposal is a temporary solution to a long-term problem. The proposal was put in place because new tokenomics will take time to implement

The Head Chef said;

“Kanpai is a temporary solution to a long-term problem, and a new tokenomics proposal is on the horizon, which will help address the long-term value proposition of Sushi for stakeholders. Sushi must implement a holistic token model that allows the rebuilding of the Treasury and delivers value for all stakeholders while reducing the fiscal liability carried solely by the protocol.”

In addition to Kanpai, the Sushi team said it increased its funding by securing several multi-million dollar partner deals. 

However, the developers added that relying on business development deals is only part of a successful business model to secure Sushi’s future. In October, asset management firm GoldenTree invested $5.2 million in Sushiswap.

Source link

Continue Reading


Europe’s McGuinness pushes for global rules after FTX collapse



Europe's McGuinness pushes for global rules after FTX collapse

Mairead McGuinness, financial services commissioner for the European Union spoke to CNBC in Brussels.

Bloomberg | Bloomberg | Getty Images

BRUSSELS — Some market players are purposely avoiding regulation in the crypto space, the EU’s top regulator told CNBC as she called for a global approach to protect retail investors.

The European Union agreed in June on the Markets in Crypto-Assets (MiCA) regulation. This is meant to reduce risks for consumers buying crypto assets. In essence, the rules mean providers would become liable if they lose investors’ crypto-assets, but the regulation is only due to start 12 months from now.

“It will not come into effect for a year, but I think it’s already having an effect,” Mairead McGuinness, European commissioner for financial services, told CNBC Tuesday.

She said that firms in the crypto industry that want to be part of the regulated system — and therefore have the seal of approval from a regulatory authority — are “already acting in a way that our legislation is pointing.”

However, she added that some crypto players are choosing to, and are fundamentally against, stricter rules.

“Some of those who were involved in crypto, from the very outset, were doing it because they didn’t want to be part of the regulated, managed system. They want it to be separate from and in parallel to it. That’s a very dangerous path,” she said.

Recent crises in the crypto world have clearly exposed the risks for consumers. The recent collapse of FTX, an exchange once valued at more than $30 billion, and the crash of supposed “stablecoin” terraUSD both highlighted the risks associated with these assets.

U.S. interest

The European Union has been stepping up rules in this space and has pushed for a global approach. In meetings last month, McGuinness discussed crypto regulation with her U.S. counterparts.

“What I found in the U.S. is huge interest in what we were doing here, and the markets and crypto assets legislation. And I believe there will be developments there,” she said.

In the wake of the downfall of FTX, some U.S. policymakers urged the Treasury to do more to tackle the risks for investors. The U.S. Treasury was not immediately available for comment when contacted by CNBC.

In the U.K., officials are reportedly working on a new plan to regulate crypto as well.

“We have seen events, let me put it like that, in this crypto space. Which maybe is a wake-up call for those who thought that investments would only increase in value,” McGuinness said.

She added that crypto is like climate change, in that it needed a global approach.

Source link

Continue Reading


New crypto wallet designed by iPod creator Tony Fadell



New crypto wallet designed by iPod creator Tony Fadell

The creator of the iPod, Tony Fadell, designed a new hardware wallet for people to store their cryptocurrency.

The product, created by French crypto asset security firm Ledger, launched at the company’s annual Ledger Op3n event Tuesday. Its launch comes at a time when trust in centralized crypto platforms is fading as a result of the collapse of Sam Bankman-Fried’s FTX.

It’s called Ledger Stax and resembles a small smartphone or credit card reader. Measuring 85 millimeters long and 54 millimeters wide, it’s roughly the same size as a credit card. It is also about 45 grams, weighing less than an iPhone. Users can deposit or exchange a range of tokens, including bitcoin, ether, cardano, solana and nonfungible tokens, or NFTs.

The Ledger Stax sports a black-and-white E-ink display, similar to that of Amazon’s Kindle e-readers. It also includes magnets, so that multiple devices can be stacked on top of each other, like a pile of books or cash — hence the name Stax. Users can connect it to their laptop through a USB cable or their phone via Bluetooth.

“Many Ledger owners have multiple devices, some store their NFTs, some store different crypto, some have multiple because they have different clients that they store for,” Fadell told CNBC in an interview.

The display also has a spine that curves around the edge, “so you can see what’s on each one, just like an old CD or cassette tape or book,” he said.

The iPod for crypto?

Initially, Fadell turned down working with the Ledger team on Stax. “This was not something I wanted to do,” he said. “When they first approached me I’m like, ‘I don’t want to do it. No thank you.’ I was interested in crypto, I had crypto at the time but I’ve basically got a lot of other things to do.”

The Ledger Stax is the latest hardware crypto wallet from French startup Ledger. It’s roughly the same size as a credit card and sports an E-ink display.

What is DeFi, and could it upend finance as we know it?

Ian Rogers, Ledger’s chief experience officer and a former executive at Apple and LVMH, said he’s confident about the mass market potential.

“There’s no question about the need for security and there’s no question that we lead increasingly online lives,” he told CNBC. “Instagram, Nike, Starbucks, Amazon — many companies are finding real life use cases for digital assets. And so I think that we will grow with that.”

Not your keys, not your crypto

After the recent collapse of FTX into insolvency, crypto holders have sought alternative means of storing their digital assets. One is via cold storage, where a user’s private key — the code they need to access their account — is kept on a device that’s not connected to the internet.

Since these wallets are offline, they’re less susceptible to hacks or failures. Ledger says that, to date, none of its devices have been hacked.

Ledger has seen a boost in sales as a result of fears around the contagion from the FTX collapse. Last week, BlockFi, a crypto lender, entered bankruptcy after revealing Alameda Research, Bankman-Fried’s trading firm, defaulted on $680 million worth of loans from the company.

November “will be our all-time high biggest month ever,” Pascal Gauthier, Ledger’s CEO, told CNBC. “All the news that you’ve seen since the beginning of the year, from Celsius all the way to FTX, has really pushed a lot of users towards self custody.”

Ledger has sold more than 5 million devices to date.

However, a sharp downturn in digital asset prices could spell trouble for the company with retail investors becoming more wary. Only 21% of Americans feel comfortable investing in cryptocurrency, according to Bankrate’s September survey. That’s down from 35% in 2021.

The Ledger Stax will compete with a slew of consumer gadgets this holiday shopping season, including Apple’s new iPhone 14, at a time when budgets are being constrained by rising inflation.

Source link

Continue Reading