Bitcoin’s ‘Inflation Hedge’ Case Is Dead; The crypto leader is heading towards $12,000
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 $200 a barrel, sometimes the best minds are wrong.
Historic inflation is driving up the price of food and fuel, among other things. Some stocks benefited as the market bet that the Fed wouldn’t dare raise interest rates in the midst of a technical recession (the US economy has contracted for two consecutive quarters, the definition of a technical recession). Stocks performed well on this bet. Although the S&P 500 has been falling since the start of the year, it is much better than Bitcoin. In fact, the whole cryptocurrency market is a dud. Some NFTs are down 85%. Buying low is like that old adage – “never catch a falling knife”.
Bitcoin, with its supply capped at 21 million coins, and Goldman Sachs “store of value” thesis (digital gold), meant that the #1 cryptocurrency traded was meant to be an inflation hedge.
“Bitcoin is not immune to macroeconomic factors,” says Andrei Grachev, managing partner at DWF Labs, a web 3.0 investor based in Zug, Switzerland. “Continued factors such as the Federal Reserve’s interest rate decision have significantly affected market sentiment, and market uncertainty means investors will turn to lower risk assets. Unfortunately, Bitcoin is still considered a newer and volatile asset to be a hedge, but I think Bitcoin is still going to be a very profitable asset for medium to long term investors.
Unlike crypto investors of the past who wanted to “host” Bitcoin forever, large investors are more likely to sell Bitcoin now when markets turn defensive.
Bitcoin: be on the defensive
Being defensive on Bitcoin basically means, don’t buy it. If you’re not buying Nasdaq, definitely don’t buy Bitcoin. Build up liquidity and wait for it to drop further, because everyone is convinced that it does.
Bitcoin tech stock correlation is complete. “Crypto’s main movers are always dedicated long-term holders,” says Kral of PrzemyslawCEO of Zonda, a cryptocurrency exchange based in Tallinn, Estonia, who thinks the Nasdaq correlation with Bitcoin is a thing of the past.
Last year and into early 2022 Bitcoin followed the Nasdaq rather than acting as inflation hedge assets like gold. The value of Bitcoin should, in theory, be uncorrelated to the stock market. One has nothing to do with the other.
“The fact that Bitcoin’s price is so correlated to financial markets indicates that we are still a long way from Satoshi’s vision of decentralization,” says Abraham Piha, co-founder and CEO of Tomi.com, a decentralized cloud computing solution provider for companies building the third generation of the Internet – the blockchain space – better known as Web 3.0.
“The (cryptocurrency) market is still quite centralized and controlled by hedge funds on Wall Street, and their liquidity is hurting all of us,” Piha says from his office in New York. “Only when we achieve true decentralization will Bitcoin be a hedge against inflation and a true store of value. Right now the only real benefit is that it is an asset. which no one can take from its owner.
Billionaire investor Paul Tudor Jones called Bitcoin a hedge against inflation last year. Mark Cuban dismissed the idea, calling it a “marketing slogan” for bitcoin enthusiasts. Cuban was right.
What’s going on?
Since the birth of Bitcoin, we have been living in an era of low interest rates that encourage investors and speculators to put their money in risky assets. Nothing is riskier than cryptocurrency. Maybe slots and roulette are more risky.
Inflation does not help Bitcoin
The recent decline in crypto prices is not really driven by inflation, but by raising interest rates to clean up excess liquidity in the market, quell inflation, and strengthen the US dollar due of rising rates. Rising interest rates mean higher Treasury yields, attracting buyers of foreign bonds from low-yielding countries like Japan and Europe. Leveraged Bitcoin Bets also cashed.
Bitcoin hasn’t been around long enough to prove whether it’s truly an inflation hedge and a store of value. Despite its rarity, the price of a cryptocurrency like Bitcoin is still primarily based on investor sentiment. It could still be accepted over time and become less volatile, but that hasn’t happened despite some small headlines about companies accepting bitcoin for the payment. This is especially true today in high end real estateoften a money launderer’s delightmaking Bitcoin the ideal partner for luxury skyscrapers in Miami and dubai.
“If you zoom out over the past decade, you can see that Bitcoin has performed better than most traditional stocks,” says Irina Berezina, the Lisbon, Portugal-based COO of Uplift DAO, a platform for cryptocurrency startups. She pointed to Blackrock’s recent foray into Bitcoin. They created a funds for their wealthy clients.
Bitcoin bears support. Until when?
The digital gold story does not work. The inflation hedge story doesn’t work. Bitcoin is crypto Nasdaq does not work.
That could change. Remember, the last time Bitcoin fell below $10,000, it spent the next 12 months climbing around $60,000.
“Rather than inflation, bitcoin is a hedge against currency depreciation and in its mature state provides an alternative to central banking,” says 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 doubting Bitcoin’s ability to act as an inflation hedge.
Unfortunately, El Salvador’s experience with Bitcoin because legal tender seems to have hit a wall. Bitcoin as an alternative to fiat is barely a success.
Bulls like Caselin focus on Bitcoin’s long-term story.
But in the short term, they see Bitcoin losing that strong correlation with the stock market. Over the past two weeks, investors have sold off the S&P 500. Bitcoin fell sharply on August 19 but has since caught up with the S&P. Over the past five days ending Labor Day, Bitcoin is down 1.1% and the SPDR S&P 500 (
One thing in Bitcoin’s favor is the currency market. The euro, book and yen are at a decade low against the dollar.
“The dollar index is moving a lot in one direction and only one direction, and that’s going up. Usually when the dollar index gets that much strength, we normally see the price of Bitcoin falling,” says Naeem Aslam , chief market strategist for AvaTrade in London, “The bulls are holding their ground. They didn’t allow the Bitcoin price to take a beating because of the tech selloff and a strong dollar,” he says.
If there is a downside capitulation now that Bitcoin is above $20,000, the next move will not be at the $18,000 or $15,000 price level; the sell-off could be so intense that it could quickly bring Bitcoin closer to $12,000, Aslam predicts.
“My general view is that the crypto winter will get worse before it gets better. Most professional traders I talk to are looking for 10,000 rather than 30,000 in Bitcoin. Buy-side demand is very limited at the moment,” says Lars Seier Christensen, Chairman of the Concordium Foundation and Founder of Saxo Bank. “The Ethereum merger is unlikely to instill any real bullish sentiment in the market, as the reality is that it’s not changing much.”
Alas, with economies looking weak due to inflation in Europe and increased interest in Western economies, Bitcoin has failed to live up to its hype as a hedge against crypto inflation.
Once it has gone through a few market cycles, investors will have a better understanding of how Bitcoin reacts to macroeconomic developments.
“There is a strong relationship between the Bitcoin price and the dollar,” Caselin says. “The dollar has shown strength in recent months, so a decline in the dollar could trigger a rally in Bitcoin in the short term. But going forward, it’s more interesting for me to watch how Bitcoin and digital assets take root in emerging markets based on use cases. Over time, such widespread adoption will stabilize Bitcoin’s growth and change the dynamic between crypto and traditional markets.
* The author owns Bitcoin.
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