Why Bitcoin Failed The Inflation Test
We were told that holding Bitcoin would be a way to hedge against the effects of inflation. As prices increased, so went the thinking, Bitcoin would holds its value.
The world has seen a massive unleashing of price appreciation over the last 15 months or so. In the United States, the Consumer Price Index (CPI) is at 40 year highs. This certainly would qualify as a situation where Bitcoin should excel.
Of course, we all know this was not happened. Since its peak, Bitcoin dropped by almost 70%. This is the exact opposite of what should have taken place.
So what happened?
Bitcoin Misframed
Bitcoin is the leader in cryptocurrency. Hence, what applies to it is actually true throughout the entire industry.
We see the common rhetoric surrounding the idea of being an alternative to the existing system. From a transactional standpoint, this could be true. However, from a market perspective, we have to own up to the fact this is still extremely volatile.
Therefore, the idea of Bitcoin, or any other cryptocurrency, at this time being a store of value is misguided. The market emphatically told us this is not so.
In fact, the volatility that is common shows how this should be a warning. Anything that is apt to 65%+ drops is not in in the store of value category. Of course, this could change in the future although the fixed supply means volatility will always be standard.
Basically, we were told that Bitcoin was the safety net against economic headwinds and issues with the traditional financial arena. For all the discussion about the USD, when the proverbial you-know-what hits the fan, people move to cash. In this case, it is the USD.
Risk On/Risk Off
The proper perspective for Bitcoin (along with other cryptocurrency) is similar to Tesla or Amazon. The last 8 months shows us that it is the risk off trade. What this means is that when people are taking risk off the table, crypto prices will drop.
We saw what happened with the high P/E tech companies. As the risk off sentiment took over, they got rocked. Tesla, as an example, lost almost 50% of its value from the highs. Volatility is ever present in this realm also.
The positive is that we are also looking at cryptocurrency being susceptible to the risk on trade. When sentiment reverses, we can expect things to take off.
Fortunately, as we know, with cryptocurrency, when a direction is decided, the moves are powerful. Thus, we can expect the bull run to be fierce to the upside.
Of course, this is not following the typical narrative. For now, it is best to retire that. Bitcoin, nor any other cryptocurrency, is going to hedge inflation. It is a risky asset and the market will treat it as such.
The other major positive is that the trend, over the longer term, is higher. This is especially true for Bitcoin which ends up reaching new highs over time. Others like Ethereum will follow that path too.
For those who are patient, we will see high upside. When risk on takes over, it will likely be similar to a rocket ship.
This is the nature of what we are dealing with for now.
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Yes, it is true that high volatile asset BTC can't be categorized as a store of value as of now. But again if someone has very long prospective of investment a part of investment can be allocated to BTC as a hedging against inflation.
Certainly over a longer timeline it could. The challenge is that we are seeing deflationary pressures. Will BTC hold up under that?
Perhaps that will be the risk on.
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Bitcoin is a volatile and new asset class. It has yet to be stress tested in a true recession. Time will tell how cryptocurrency reacts.
As you say is an extremely volatile asset. You cannot count on it to pay your rent or current bills!
Actually if you time it right, you could. Look at the early adopters of BTC, they are paying for a lot more than rent I imagine.
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Timing is a good thing if you take profit along the way.
Tough topic to tackle.
Excellent topic to discus, as Bitcoin failed to be the anti-inflation pill, and many were disappointed. I agree we must accept that Bitcoin will be Bitcoin, not some magic pill we envision it to be, and it is a risky, volatile asset which has outperformed other risky assets.
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All of the traditional crypto falls into this. Just wrote an article how Stablecoins like HBD will help to lead the way.
They do not have the same degree of volatility and can serve as a unit of exchange most understand.
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I agree 100%. I read articles where people look at stablecoins with distain, as the anthesis of crypto because they are sometimes pegged to the dollar. But we needd more then one tool in our tool belt to fix the broken machine. This is both a tool and a innovation, which like you said, is part of the way or path forward.
I will read your article.
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I do not fully agree with your thesis. If it is true that Bitcoin is too volatile in the short term to be a refuge value. But neither is Gold, the traditional refuge value against inflation, protecting this time. Only real estate is giving some protection and it is a difficult market to evaluate.
I believe that shelter values should be evaluated more in the medium and long term.
The good thing about your thesis is that if Bitcoin is not a refuge value then it can be something much bigger.
A 40 year high in the CPI and gold is $300 (roughly 15% off its high and at the same level it was in 2011.
So it seems gold failed the inflation test too. Perhaps the gold bugs are misleading about that too.
If gold was a hedge, the price should be over $3,000.
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An asset can't be a store of value if it's volatile in the short term is what you're saying? If you pick any 4 year period from the bitcoin chart, it's always up in price, still not a store of value?
What's your definition of a store of value or what time frame are you using?
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Something that will retain its value over time and can be exchange for the same, or more.
The problem with isolating time frames, what you call the short term, is that we are now 9 months in during a major run up in prices. Hence, Bitcoin failed in that regard.
If you have a major run up with near double digit CPI readings, and BTC is down 70% how are you calling it a store of value.
Sure over the long term we could say, it heads higher. But then so does Amazon stock. Yes few would turn to that as a SoV.
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I agree and BTC is very volatile and it doesn't help that the inflation for the supply of BTC doesn't really help much either. After all, BTC tokenomics tend to be more deflationary and there just needs to be more supply and demand on both sides to stop these price swings.
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Actually disinflationary. The fact that Bitcoin is successful is due to the inflation (BTC printing) that took place.
This is lost on many Bitcoin advocates. There would be no miners without the incentive that comes from printing the token.
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This is precisely the case. Bitcoin is no safe haven or a store of value asset. It is best described as an unconfiscatable, extremely secure, independent asset and medium of exchange that does not depend on the current legal and political framework to function. The way Bitcoin works internally is not subject to the whims of regulators or politicians.
The current monetary system is hostage to the structural problems in developed economies. Central banks are forced to buy sovereign debt like no tomorrow.
If anyone wants to opt out of that system, Bitcoin is for them. Bitcoin is the easiest crypto asset for institutions to get exposure to.
In the case of the EU, commercial banks.
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Btc is a risky volatile asset and for those that has accept the risk will see it at low price and also at ATM. No magic anywhere
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Over time, I think it will keep mooning. The challenge is, as a disinflationary asset, it will always have a degree of volatility. Thus, it is great for traders while HODLERs dont care. Those, however, who are in need of the money it doesnt work.
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This is me getting on the rocket ship along with you guys:
I see your point and I go through the comments to hear other views and considering your points presented I also agree. The long-term BTC standard but could show some downside on a major bear run. According to this video on Twitter, I got to know that this is not even the third time BTC has gone this low.
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Exactly, bitcoin is highly volatile. Not to be trusted for quick money😑
Bitcoin is utter trash, only people who don't understand economics think it's otherwise. To be a store of value you have to contain certain currency like properties. Bitcoin is a shit currency. It's not stable enough at any given time to be any type of currency. So it lacks that. gold was a much better currency than bitcoin and gold was a shit currency but still better than bitcoin because it was enough to go around.
Bitcoin is just pretty much shit in every categorty with the exception of being hard to confisicate but super easy to manipulate. bitcoin myk didn't drop 70% it's the only crypto that works due to it's sell pressure to keep it stable because it's free!
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What is the definition of store-of-value?
Much like professional gambling, a single bet is 100% luck, while a million bets is 100% skill with a defined hourly wage.
This same concept applies to Bitcoin.
Bitcoin is 0% store of value in the short term and 100% store of value (more like creator of value) in the long term.
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Only time is more scarce than Bitcoin, volatile only in the short term, in the long term it is anti-inflationary. The best strategy for bitcoin is DCA and holding.
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The value of bitcoin is often translated into US dollars and as such whatever happens to that currency (such as inflation) will negatively affect bitcoin. It is simple logic that crypto enthusiast seems to have missed out on.
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It is all matter of time and perspective. It makes a world of difference whether you entered in Bitcoin and other crypto in 2016 or 2017 (or in early 2017 vs. late 2017).
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I might add, most people who are big into crypto, know very little about fiat FX and international banking cartels' activities. When the Dollar gets bid up, everything else dumps, Bitcoin included. So when the Dollar is weak, as it was in 2020, BTC flew. a near 20x in under a year was insane, but look at how poorly the US Dollar was performing against everyone else, until that flipped, and now, the rest of the world's fiat currencies are all performing poorly against the Dollar (except the Ruble, of course).
BTC is definitely a risk asset, and has traded in line with the NASDAQ-100 and S&P500 pretty closely for over 2 years. The legalization of fiat-controlled CME Bitcoin Futures contracts was a nail in the coffin in the inflation hedge argument. IF Bitcoin's price is so heavily-determined by speculation in futures, there's no hope for a de-coupling any time soon. The same thing happened to Ethereum. Less than a week after those futures contracts were launched on the CME, the price in USD terms dumped hard from the peak.
BTC operates as a store-of-value when you exit the fiat system. To say it is a hedge while you're still holding the majority of your wealth in fiat or fiat-denominated assets is shortsighted. Until you fully exit, it isn't a hedge, because you're still completely exposed to the FX risk with the US Dollar.
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