Why Bitcoin is an inflation hedge, but only sometimes

Bitcoin is an inflation hedge, but only under certain circumstances, says Steven Lubka, Managing Director of Private Client Services at Swan Bitcoin.

According to Lubka, Bitcoin is a good hedge against some inflationary pressures such as quantitative easing, but against others such as supply chain disruptions it performs worse.

Lubka’s comments come during a difficult period for both cryptocurrency and the financial markets. Bitcoin is currently trading at $23,348, up 20.3% on the month but down 44.1% on the year. Meanwhile, the S&P 500 is up 8.04% on the month, down 5.8% on the year to 4,129.

Understanding Inflation

Inflation basically referred to the printing of fresh money against the delivery of fixed collateral, such as silver or gold. For years, however, fiat – physical paper money – has not been backed by such collateral.

Today, the term inflation is used to describe two separate things that share surface similarities because they increase the price of consumer goods, but at their core are fundamentally different.

One is inflation caused by quantitative easing or money printing, the other is caused by increased scarcity of goods.

With US inflation at 9.1%, the highest level in 40 years, understanding the difference is increasingly relevant.

“Inflation and what’s happening right now has captured the average person’s attention in a way it never has before,” Lubka explained on the What Bitcoin Did Podcast. “I think the average person didn’t care about inflation over the last two decades. And why would they? It was relatively low, it didn’t really affect their lives, but people are really feeling it today.”

The problem that consumers and Bitcoin holders currently face, says Lubka, is that they face both types of “inflation” at the same time. The first type was good for Bitcoin prices, but the second was not.

“In the beginning there was a huge money creation – so the US is printing a ton of money to bail out COVID and everything else. Bitcoin goes from 10k to 69k, let’s make no mistake, when they printed money, and they expanded the money supply Bitcoin was a of the best performing assets … Bitcoin hedged you against the expansion of the money supply.”

However, here is the sting in the story.

Like Lubka observes“Later, we have this second wave of inflation that’s really centered in food and energy, and it’s because of the war, it’s because of supply chain disruptions … Let’s be clear, the war was the spark that set everything on fire, but we set off a bunch of ignition for decades by not investing in these things.”

After the second wave of inflation, Bitcoin prices fell to where they are today.

A complex picture

Understanding inflation is no easy task. As Lubka explains it, the picture is complex. While the recent drop in Bitcoin prices has challenged the logic that BTC is a hedge against inflation, a better understanding of what inflation is provides a more nuanced view.

The good news for Bitcoin HODLers is that a less desirable form of “inflation” doesn’t always have to be permanent. Disruptions in the supply chain can eventually be resolved and prices can fall again.

The bad news is that such resolutions may be quite a long way off.

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