Bitcoin, like many other things, has been predicted since its inception in 2009. However, the most discussed aspects were the fungible form of future money and inflation hedge.
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The halving cycle (a halving event that occurs approximately every four years) coincided with the outbreak of the COVID-19 pandemic, which has strengthened the faith of many people in new technologies as a real hedge against inflation and global shocks. However, after a year, BTC lost 75% of its market value, and little is consistent with the inflation hedge theory.
During last year’s bull cycle, companies like Microstrategy, Tesla, and many other public companies doubled down on Bitcoin’s inflation hedge by adding Bitcoin to their corporate coffers. Microstrategy started buying BTC when the main cryptocurrency was trading in the price range below $10,000 and continued to buy it until the market peaked when the price of BTC approached $69,000.
At first, this decision looked very lucrative as the price of bitcoin reached new highs every month, and many in the crypto community hailed the CEO of Microstrategy as a champion of bitcoin’s “inflation hedge”. However, public sentiment quickly changed with the advent of a bear market, which was only exacerbated by high inflation caused by various geopolitical issues, such as the war in Ukraine and the ensuing food and energy supply crises.
Inflation is now reaching new highs around the world, and many countries are struggling to avoid a recession. Bitcoin, like most other assets, has struggled to remain a profitable investment option, but that doesn’t necessarily mean it has completely failed as a hedge against inflation, some say.
Casper Vandelok, CEO of quantitative trading firm Musca Capital, believes that BTC remains one of the best performing assets despite the economic downturn, but it depends on how it is framed:
“Of course it dropped 75%; however, when compared to the strongest assets, if we compare it with currencies such as the Turkish lira, it shows more strength. Moreover, it is unlike other hedge assets such as gold, which have not experienced significant declines before. One factor that many overlook is that inflation hedges are a kind of “insurance” like real estate, while gold is difficult to store and sell because it is illiquid. Bitcoin offers many benefits that these assets do not have.”
Speaking about the role of Microstrategy, Wandelok believes that the Fortune 500 bet has worked the most when it comes to MicroStrategy: “Since we can’t have an exchange-traded fund, how can we give others the opportunity to speculate on the price of bitcoin? That’s what MicroStrategy is trying to do, and they’ve succeeded.”
The idea that bitcoin is a hedge against turbulent financial markets stems from the most important inherent characteristics of cryptocurrency, such as a fixed supply of 21 million with centralized control over its monetary policy. Bitcoin’s proponents believe that the meager supply added with growing mainstream acceptance will eventually make it a better hedge against inflation than gold and other similar safe-haven assets. Others believe that the time frame will also play an important role, given that BTC is still a new asset class compared to others.
Bitcoin’s uncertain status as a hedge against market conditions can be attributed to several factors, including a number of macro factors. The current market downturn is caused not only by the fragility of the financial market, but also by the actual deterioration of market conditions due to several external crises, such as ongoing geopolitical tensions, which in turn have led to financial instability.
Experts believe that in times of geopolitical crisis, the US dollar becomes the main means of protecting against inflation. Martin Hisbock, head of blockchain and crypto research at Uphold, told Cointelegraph that none of the assets currently offer an inflation hedge due to the strength of the US dollar:
“We all thought that bitcoin would be a way to hedge against inflation, but it turns out that in times of war, the safe haven is still the US dollar, which is expected to have more military power than decentralized computer networks like bitcoin. The strength of the US dollar has been affected by the cryptocurrency, as well as the many scams and hacks that have taken place since the beginning of the year.”
He added that the truly decentralized nature of Bitcoin reduces its appeal in times of conflict as it is not backed by any government.