Home News US inflation breaks 40-year record: Can Bitcoin serve as a hedge asset?

US inflation breaks 40-year record: Can Bitcoin serve as a hedge asset?


On Feb. 9, the US Bureau of Labor Statistics announced that the Consumer Price Index, a key measure catching the adjustment of the amount Americans pay for labour and products, has expanded by 7.5% contrasted with a similar time last year, denoting the best year-on-year ascend starting around 1982. In 2019, preceding the worldwide COVID-19 pandemic broke out, the pointer remained at 1.8%. Such a sharp ascent in expansion makes an ever-increasing number of individuals think about the old inquiry. Could Bitcoin, the world’s biggest digital money, become a support resource for high-expansion times?

What’s up with the inflation spike?

Surprisingly, the strong state of the US economy is the primary cause of the record inflation surge. Following the COVID-19 disaster, which resulted in the loss of 22 million jobs and a large drop in national economic output, the US economy began a dramatic comeback on the back of the vaccine campaign’s relative success. Supply chains, on the other hand, appeared to be unready for such a swift rebound incorporating activity and consumer demand.

The recovery was aided by the Biden administration’s $1.9 trillion COVID-19 relief programme. Which provided thousands of dollars in direct federal assistance to the majority of American households. Given the overall financial conditions of American consumers, Tom Siomades, chief investment officer of AE Wealth Management, believes the stimulus was excessive. He expressed his thoughts in the following way:

“The $1.9 trillion CARES Act, passed in March at a time when Americans were already saving at a 20% rate, flooded the economy with more money than it could handle. That money allowed folks who might have gone back to work otherwise to reconsider their alternatives. As a result, there was a labour scarcity, which led to increased demand for higher wages, which resulted in greater costs and prices.”

The Federal Reserve’s efforts to address inflation

A more subtle aspect, according to some economists, is the frightening exercise of corporate pricing power by US corporations. “Producers will be loath to accept lower rates for their products now that they know people can pay more,” Siomades argues.

All eyes are on the Federal Reserve‘s efforts to address inflation now. That has become a big political concern for the Democratic Party. By the end of the year, the inflation surge is expectable to recede to pre-pandemic levels. If not to more mild levels. Nonetheless, as growing prices become a source of public worry, individual citizens and investment experts alike look for a safe harbour for their money. Which is where Bitcoin comes in.

Bitcoin as the “new gold”

The frequency of parallels with gold in terms of reserve-asset potential grows with each year as Bitcoin and the cryptocurrency sector become more mainstream. Bitcoin, according to many experts, maybe even more appealing than gold in this aspect. The leading cryptocurrency was up 133% year-over-year in November 2021, compared to only 4% for gold.

Bitcoin has substantially outperformed US inflation in the last 13 years, according to Todd Ault of investment firm Ault Global Holdings. Thanks in no small part to the asset’s deflationary features. He made the following observation:

“What makes it a good inflation hedge and store of wealth is that mining it has a cost; there will only be $21 million Bitcoin available. That is, the number of Bitcoins that may be mined is limited […] It’s still a classic hedge; there’s a finite supply, and it’ll continue to be in demand even in the current financial climate.”

BTC lacks crucial characteristics of a stable, low-volatility asset

Bitcoin, unlike gold, lacks crucial characteristics of a stable, low-volatility asset. Perhaps this isn’t a problem for a devoted, diamond-hands hodler who believes in Bitcoin’s ultimate monetary dominance. But the unpredictability could be unsettling for someone who has invested a considerable portion of their personal money as a hedge against inflation. Bitcoin’s price fluctuations contrast sharply with gold’s relative stability. Which serves as a preserver of purchasing power rather than a wealth multiplier.

“Because there is a finite supply of tokens that can be mined, Bitcoin should theoretically be a strong inflation hedge”. As Katie Brockman, an analyst at investment advisory firm The Motley Fool, observed, “this generates a type of scarcity, which could help it keep its value over time compared to fiat currencies.” Bitcoin, on the other hand, can only be used as a store of value if a large number of people find it useful. Brockman continued:

“Bitcoin doesn’t seem to have progressed to that point.” Inflation has risen, yet Bitcoin’s price has dropped in recent months. It has also dropped at a similar rate as meme tokens such as Dogecoin, implying that many investors see Bitcoin as just another cryptocurrency rather than a store of value.”

However, just because Bitcoin is currently an imperfect inflation hedge does not indicate it will never be a dominant store of value. However, if the money is to become inflation-proof, it must achieve public support as well as a strong mainstream reputation.

Hedge over time

The future of Bitcoin determined by how investors use it. If investors are holding Bitcoin as an inflation hedge, it may not be susceptible to the same volatility cycles as stock markets. However, if the majority of investors trade Bitcoin like stocks, the asset’s price may be more closely in link with the market changes.

The top cryptocurrency’s future appears bright, but the timing is less certain. At a price of around $2 million per BTC, according to Ault, the volatility may come to an end. He continued by saying:

“Bitcoin is possibly to become a multi-trillion-dollar asset class as a result of this process. That makes it a long-term hedge rather than a straight hedge.”

Uneven distribution of crypto wealth is a problem that may grow more pronounced in the future. As BTC’s popularity grows in waves, so does the cost of entry into the market. As a result, substantial amounts of its monetary stock will inevitably be concentrated among a small number of wallets.

This leads us to the Bitcoin conundrum. To become the “new gold” in terms of inflation hedging, the original cryptocurrency appears to need to outgrow its speculative appeal and become a widely (and, possibly, more evenly) spread mass of money. One thing that could undoubtedly help crypto reach these aims is a strong regulatory framework.

Expert warns higher inflation could whip BTC price to $30K

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