If you are one of them who want to be a racer in the crypto market, then let’s understand the basics before we indulge further.
What is a hedge against inflation?
A hedge against inflation is intrinsically an asset or an investment that maintains or increases its value over a course of time while protecting itself against adverse price fluctuations in the economy.
While inflation is a good attribute of a healthy economy, it decreases the purchasing power of the economy if they deal with cash in hand. This is why they turn their hard-earned money into the various store of value investments, such as bonds, stocks, cryptocurrency
etc. This is exactly why the cryptocurrency is a very popular resort for inflation-phobic investors because it gives some protection against the inflated money supply. Needless to say, the advantages of a cryptocurrency over traditional finance soar in financial distress and war conflicts. However, one must know that it is not a magical hedge against inflation by any means. What is wonderful is that gold, which was once considered to be a preferred method of hedge against inflation, is no longer serving the purpose that it once used to fulfill. This void can rightly be covered by cryptocurrency and the inflation in the USA is indeed helping drive the investing activity in cryptocurrency.
Inflation is measured by the Consumer Price Index, which has constantly been facing an upward trajectory. It doesn’t come off as a surprise that inflation is on the rise again. These challenging times have pushed the investors to an edge: In a quest to figure out where to park their money. Needless to say, bitcoin is considered to be the most valuable cryptocurrency across the globe at large. The traditional rule of thumb dictates that the price of bitcoin ought to soar high in times like these. However, we have witnessed a completely different scenario. Hence, does it imply that bitcoin is an unsafe means of investment during inflation? Nope. Here is how:
The very definition of an inflation hedge is a flawed concept:
The process isn’t as easy as buying off bitcoin during times of inflation and waiting for nirvana until the inflation cools down. A lot of other forces also impact the price of an asset. After the war in Ukraine and the Federal Reserve’s plan to hike the interest rates, a lot of investors are chickening out of riskier assets. An investor’s sentiment is generally unpredictable, and there is nothing one can do about it. However, it is this very sentiment that causes wild swings in the price of the assets. The asset’s inconsistent performance to outpace inflation has been one of the leading causes of fear in the minds of investors.
Second-order thinking
This term was coined by Howard Marks and applies exceptionally well to cryptocurrency during inflation. If something is widely believed to be an inflation hedge, then it’s likely for the asset to be priced accordingly, based on the buyers’ higher demand. Hence, it’s prudent to sell, instead of buy during this time.
Gold is considered to be a very secure inflation hedge, but has also had a hindered journey in this regard.
In a short period, nothing exactly constitutes a proper, reliable inflation hedge. However, bitcoin’s whopping five-year return of 1,100% in times when the CPI increased only 18.5% displays how great of an inflation hedge it can prove to be. Despite being extremely volatile, people who purchased bitcoin would’ve experienced an increment in their purchasing power. Doesn’t that serve the very premise of investing? The idea is always to raise one’s ability to spend over time, and not lose it.
Deciphering the structure of bitcoin
A part of bitcoin’s structure includes the fact that it possesses a fixed supply of 21 million coins. Hence, high demand for bitcoin would ultimately lead to an increment in the prices, which will further promote it as an inflation hedge. Cryptocurrency often works closely in its relationship with inflation. In that particular sense, whenever the price pressure gets hot, cryptocurrency is supposed to get hotter.
Let’s get our focus on the main pitch for bitcoin: It is a hedge against inflation because its value will hold over time. Also, in comparison with gold, bitcoin can be blindly considered to be an effective store of value. Investing is a good game of returns if you extend your time horizons and widen your scope. Nothing can happen in a month, or something monumentally bad can take place too. If you design a portfolio on what may happen during such a short period, it will ultimately bless you with a losing game. A short period is a no-man’s land. It’s unknown and scary. Hence, one should view bitcoin in such a light too. Despite its 35% downfall so far in 2022, the progress, if tracked over time, speaks for itself.
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