Bitcoin’s ‘Inflation Hedge’ Case Is Dead; Crypto leader heading to $12k
Bitcoin was once considered digital gold. Like gold, it would be a hedge against inflation. Not so. … [+]
Ladies and gentlemen, I hate to say this, but Bitcoin
We all wanted Goldman Sachs to be right when they called Bitcoin digital gold. But like their call in 2008 that oil was going to cost $200 a barrel, sometimes the best minds get it wrong.
Historic inflation pushes up the prices of food and fuel, among other things. Some securities profited as the market bet that the Fed would not dare to raise interest rates in the midst of a technical recession (the US economy contracted for two consecutive quarters, the definition of a technical recession). Stocks did well on this play. Despite the fact that the S&P 500 has been down so far this year, it is much better than Bitcoin. In fact, the entire cryptocurrency market is stupid. Some NFTs are down 85%. Buying at the lowest levels is like the old saying – “never catch a falling knife.”
Bitcoin, with its limited supply of 21 million coins, and Goldman Sachs’ “store of value” mission (digital gold), meant that the No. 1 traded cryptocurrency was supposed to be a hedge against inflation.
“Bitcoin is not immune to macroeconomic factors,” says Andrei Grachev, Managing Partner at DWF Labs, a Web 3.0 investor based in Zug, Switzerland. “Ongoing factors such as the Federal Reserve’s decision on interest rates have greatly affected market confidence, and market uncertainty means investors will turn to low-risk assets. Unfortunately, Bitcoin is still viewed as a newer, volatile asset to be a hedge, but I believe Bitcoin is still going to be a very profitable asset for medium and long term investors.
Unlike crypto investors of the past who wanted to “hold” Bitcoin forever, big money investors are more likely to sell Bitcoin now that markets are turning defensive.
Bitcoin: Get defensive
Bitcoin was highly correlated with the Nasdaq. When it fell, Bitcoin fell more. It is now offline. … [+]
Getting defensive on Bitcoin basically means, don’t buy it. If you don’t buy Nasdaq, you definitely shouldn’t buy Bitcoin. Build cash and wait for it to fall further, because everyone is convinced that it is.
Bitcoin’s tech stock correlation is over. “Crypto’s main drivers are still dedicated, long-term holders,” says Przemysław Kral, CEO of Zonda, a cryptocurrency exchange based in Tallinn, Estonia, who believes the Nasdaq correlation to Bitcoin is a thing of the past.
Last year and into early 2022, Bitcoin followed the Nasdaq rather than acting as an inflation hedge like gold. In theory, Bitcoin’s value should be uncorrelated to the stock market. One has nothing to do with the other.
“The fact that Bitcoin’s price was so correlated with the financial markets indicates that we are still a long way from Satoshi’s vision of decentralization,” said Abraham Piha, co-founder and CEO of Tomi.com, a provider of decentralized cloud computing solutions for businesses that build. the third generation of the internet – the blockchain space – best known as Web 3.0.
“The cryptocurrency market is still pretty centralized and controlled by Wall Street hedge funds, and their liquidity is hurting us like everyone else,” Piha says from his office in New York City. “Only when we achieve real decentralization will Bitcoin be a hedge against inflation and a true store of value. Right now, the only real advantage is that it is a resource that no one can take from its owner.”
Billionaire investor Paul Tudor Jones called Bitcoin an inflation hedge last year. Mark Cuban dismissed the idea, calling it a “marketing slogan” for Bitcoin enthusiasts. Cuban was right.
What’s up?
Since the birth of Bitcoin, we have lived in an era of low interest rates that encouraged investors and speculators to put their money in risky assets. Nothing is riskier than cryptocurrency. Perhaps slot machines and roulette are more risky.
Inflation does not help Bitcoin
Mark Cuban said the idea that Bitcoin would be an inflation hedge was a “marketing slogan” for … [+]
The recent decline in crypto prices is not really driven by inflation, but by the rising interest rates to clear excess liquidity in the market, contain inflation and strengthen the US dollar due to rising interest rates. Rising interest rates mean higher government yields, attracting foreign bond buyers from low-yielding nations such as Japan and Europe. Spent Bitcoin stakes have also been paid out.
Bitcoin has not been around long enough to prove whether it is truly an inflation hedge and a store of value. Despite its scarcity, the price of a cryptocurrency such as Bitcoin is still largely based on investor sentiment. It may still gain acceptance over time and become less volatile, but that hasn’t happened despite some small headlines about companies accepting Bitcoin for payment. This is mostly true today in high-end real estate, often a delight for money laundering, making Bitcoin the perfect match for luxury high-rises in Miami and Dubai.
“If you zoom out over the past decade, you can see that Bitcoin has outperformed most traditional stocks,” says Irina Berezina, Lisbon, Portugal-based COO of Uplift DAO, a cryptocurrency startup platform. She pointed out Blackrock’s recent attack on Bitcoin. They created a fund for their high net worth clients.
If BlackRock
Bitcoin Bears are in charge. Until when?
The digital gold story doesn’t work. The inflation hedge story doesn’t work. Bitcoin is a crypto Nasdaq does not work.
That may change. Remember, the last time Bitcoin fell below $10,000, it spent the next 12 months climbing to around $60,000.
“Rather than inflation, Bitcoin is a hedge against currency depreciation and in its mature state offers an alternative to central banking,” said Ben Caselin, head of research and strategy at AAX in Hong Kong. “In places like Argentina, Turkey, Nigeria or other countries where inflation has been high for decades, there is no question about Bitcoin’s ability to act as a hedge against inflation.”
Unfortunately, El Salvador’s experiment with Bitcoin as legal tender appears to have hit a wall. Bitcoin as an alternative to fiat is hardly a success story.
Bulls like Caselin are focused on the long-term story of Bitcoin.
But in the short term, they see Bitcoin losing its strong correlation with the stock market. Over the past two weeks, investors have sold the S&P 500. Bitcoin took a big plunge on August 19, but has caught up with the S&P since then. Over the past five days ending Labor Day, Bitcoin was down 1.1%, and the SPDR S&P 500 (
The long crypto winter has taken more than 50% of Bitcoin’s value this year. It is twice … [+]
One thing in Bitcoin’s favor is the foreign exchange market. The euro, pound and yen are at decade lows against the dollar.
“The dollar index moves a lot in one direction and one direction only, and that is the upside. “Usually, when the dollar index gains that much strength, we usually see the Bitcoin price crash,” said Naeem Aslam, market strategist at AvaTrade in London. “Bulls hold their own. They haven’t let the Bitcoin price get beat because of the technology selloff and a strong dollar, he says.
If there is a capitulation to the downside now that Bitcoin has breached $20,000, the next move will not be about the $18,000 price level or $15,000; The selloff could become so intense that it could quickly push Bitcoin closer to $12,000, Aslam predicts.
“My overall view is that the crypto winter will get worse before it gets better. Most professional traders I talk to are looking for 10,000 instead of 30,000 in Bitcoin. There is very limited demand on the buy side at the moment,” says Lars Seier Christensen, chairman of the Concordium Foundation and founder of Saxo Bank. “The Ethereum merger is unlikely to instill real bullish sentiment in the market, as the reality is that it doesn’t change much.”
Unfortunately, with economies looking weak due to inflation in Europe, and higher interest in the Western economies, Bitcoin failed to live up to its hype as a crypto-inflation hedge.
Once it has been through a few market cycles, investors will better understand how Bitcoin reacts to macro developments.
“There is a strong relationship between Bitcoin’s price and the dollar,” Caselin says. “The dollar has shown strength in recent months, so a decline in the dollar could start a rally in Bitcoin in the short term. But in the future, I’m more interested in seeing how Bitcoin and digital assets take root in emerging markets based on use cases. Over time, such widespread use will stabilize Bitcoin’s growth and change the dynamic between crypto and traditional markets.”
*The author owns Bitcoin.
