Is Bitcoin a Good Hedge Against Inflation?
It's a tale as old as time. Just as the prices of Bitcoin and the crypto market in general, begin rising to a point where you forget how you were feeling bearish just a few days ago. Giving you hope that the worst of this downward cycle had now officially come to an end. Perhaps you even began to feel FOMO and rushed to buy even more crypto while prices were still relatively cheap. Only for the entire situation to change in an instant. The last few days the mood in the Bitcoin market had completely changed. People were feeling positive again, and I must admit it was a nice pace from what we had experienced throughout the summer. But, then the FOMC numbers were released by the US FED and it was like Bitcoin got punched in the face.
As you can from the chart above. Bitcoin was slowly yet gradually inching its way towards $23k. There was even a lot of talk about the price reaching $30k sooner than later. But, the instant that the FED release the FOMC numbers, the price of BTC dropped by $1,000 and kept dropping from that point on. If you're not aware, the FOMC numbers calculate the interest numbers in the USA during the month and this month's results ended up being higher than expected. In the US the prices of gasoline have been dropping, but the prices of other things have canceled out that drop. Things such as the price of food, heat, rent, health insurance, and the list goes on. Everyone who follows the market at all will already know that the world is in a horrible situation. Even people who don't pay attention to the financial markets are aware the prices have drastically increased just by going to the store and making their normal purchases. The reason why the market reacted so heavily to this news is that there was hope or an assumption that things were starting to improve. After all, the US had been aggressively raising interest rates during the last several months. Because the inflation results were in contrast to expectations, that is why all financial markets dropped aggressively yesterday.
But why did Bitcoin drop?
The frustrating thing is that during the release of the inflation numbers, Bitcoin also dropped along with every other financial market. Bitcoin was created to be an escape from the deflation of other assets by governments. This is the moment that should be Bitcoin's time to shine. It was built for this. Yet Bitcoin dropped just as much if not more than other financial markets. Does this mean Bitcoin is a failure? That it should no longer be considered a hedge against inflation?
Let's unpack this important topic.
The short answer is that Bitcoin isn't a failure. While it might seem like it today, I would argue it is still one of the greatest assets to protect yourself from inflation. But why did the price drop?
The simple answer is that Wall Street has entered the Bitcoin market. Many of us who have been investing in Bitcoin for several years had been dreaming of the moment that Wall Street would finally enter the Bitcoin market. With them investing unimaginably large amounts of money into the market, the price of Bitcoin would pump to amazing heights. We all had dreams about just how rich we were going to become. As luck would have it, Wall Street has entered the Bitcoin market. But, it is different than we imagined it would be. Wall Street is ruthless in its aim to make profits. Often, they would no qualms about selling Bitcoin for a guaranteed 7% profit, rather than holding for that potential parabolic move. They treat Bitcoin just like any other financial asset. When macro is bullish they buy and sell when it is bearish as well. At the end of last year, the US introduced a Bitcoin Futures ETF, which makes it even easier to potentially manipulate the price of Bitcoin to make profits. While many of us have most likely considered the people or organizations on Wall Street to be the best of the best. To know everything about all financial assets. The truth of it is that many of these organizations have very little understanding of Bitcoin. While the current price of Bitcoin is sitting around $20k. Many experts claim that if Bitcoin was priced at its true current value, it would be over $40k. If the financial analysts understand what Bitcoin actually was and where the prices were going to be headed. There simply wouldn't be any Bitcoin for normal retail buyers like you and me. This would have Bitcoin's price well over $100k. For the time being, we should appreciate that we are in on Bitcoin's secret before the big players fully understand it.
Unfortunately, the other reason why Bitcoin's price dropped with this inflation news is that the asset is just too young. As I mentioned before, during times of inflation panic, Bitcoin should be the asset that people are rushing towards. However, there just hasn't been enough time for people to trust it yet. They feel more comfortable with dollars and that is understandable. When the automobile was first becoming popular, there were large amounts of people who refused to use it and preferred to travel via horse and buggy. They felt it was safer. When airplanes became popular, people still preferred to travel by car or train. It takes time for people to become comfortable with each new major upgrade and it will take people time to become comfortable with Bitcoin. It has already begun to happen. Comparing Bitcoin's adoption rate and image with regular people before the Covid outbreak and until today is completely different. The adoption rate of Bitcoin was sped up by at least ten years. While regular people may not view it as an inflation hedge today. It will happen sooner than most think.
The last few months there have been complaints that Bitcoin hasn't been a good hedge against inflation. That it has failed its main purpose. I would simply say these people are wrong. While it is true that Bitcoin has recently been very correlated to other financial markets and what is happening in the macro world. With that said, we must look at the full picture to understand how Bitcoin has been performing against inflation. To do that, we need to look at how Bitcoin's price has performed throughout the entire Covid situation, beginning in March of 2020.
During the March covid price crash, Bitcoin's price dropped to nearly $3,500. It went as high as $69k but is currently sitting above $20k. This means that even when the recent summer price drops we have been experiencing. Bitcoin's price is still nearly 6x higher than when this whole mess first began. Few assets have been performing better against inflation. Bitcoin is doing incredibly well. You and I both know this, but eventually Wall Street and retail buyers will wake up to this fact too. Once that happens; that is the moment that Bitcoin's price will go parabolic.
How about you? Had you been second-guessing Bitcoin's ability to be a hedge against inflation?
As always, thank you for reading!
