Why bitcoin does not seem to be a hedge against inflation

Bitcoin has plummeted in value this year, weakening the argument often made by crypto enthusiasts that it can be an effective hedge against inflation in times of economic turmoil.

Proponents of Bitcoin have long argued that its scarcity would protect its value in times of rising inflation. Unlike central banks – which can increase the supply of money – there is a fixed number of coins, which keeps them scarce.

Even before the market crashed, there was debate as to whether bitcoin would hold its value. Billionaire investor Paul Tudor Jones was bullish on bitcoin as an inflation hedge, while Dallas Mavericks owner and investor Mark Cuban dismissed the idea as a “marketing slogan.”

Another argument is that bitcoin, along with other similar cryptocurrencies, will have an inherent value stock over time as it becomes more accepted, such as gold. Supporters believe it will be seen as an asset that will not be depreciated over time.

However, this has not been proven to be true, at least not yet. The value of the cryptocurrency market as a whole has coincided with rising inflation, with bitcoin losing half its value since January. As of Friday, the price of bitcoin is $ 21,833, according to Coin Metrics.

With crypto, “the scope of [price] Volatility is so significant that it is very difficult for me to see it as a long-term value store, says Anjali Jariwala, certified financial planner and founder of Fit Advisors, to CNBC Make It.

Jariwala says that crypto in general is a new type of asset that does not yet function either as a coveted commodity like gold, or even as a currency, “because it is not easily exchanged for a commodity or service.” Despite the scarcity, the price of a cryptocurrency such as bitcoin is still largely based on consumer sentiment, she says.

“It is difficult because it is meant to function as a currency, it is taxed as property, and some people compare it to a commodity. At the end of the day, it really is its own asset class that does not have a pure definition.”

Another assessment is that cryptocurrencies such as bitcoin have only been around for a little over a decade. Because of this, “there is not enough history there when it comes to historical data to really understand what purpose it serves as an investment,” says Jariwala.

Although cryptocurrencies such as bitcoin “have not been proven” to be a reliable, long-term asset, they can still gain acceptance over time and become less volatile, says Omid Malekan, an assistant professor at Columbia Business School who specializes in crypto and blockchain technology. tells CNBC Make It.

“Once volatility evens out, we will have a better picture of how it responds to macroeconomic developments, such as the rate of inflation or what the Fed is doing,” he says, warning that current cryptocurrencies may reflect all inputs except inflation, which for many handed down cryptocurrency borrowers or lack of regulation.

In any case, crypto as a whole remains a very speculative investment. Jariwala only recommends investing with money you are willing to lose. She also says to think of crypto-investment as a long-term strategy and “stick to that strategy even in times like this.”

Cryptocurrency can develop into a more mature asset that can be a hedge against inflation. But “we just do not know yet, until we see more of a track history with it,” says Jariwala.

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