On February 9, the US Bureau of Labor Statistics reported that the Consumer Price Index, a key measure of how much Americans pay for goods and services, rose 7.5% year over year, the largest increase in years. Since 1982. In 2019, before the global COVID-19 pandemic, the rate was 1.8%. This rise in inflation is prompting more and more people to ponder the age-old question: Could Bitcoin, the world’s largest cryptocurrency, become a hedge fund in times of high inflation?
What happens with high inflation?
Ironically, the main reason for high inflation is the sound health of the US economy. In the immediate aftermath of the COVID-19 crisis, with 22 million jobs cut and national economic production declining, the US economy began to improve dramatically after the relative success of the vaccination campaign. However, supply chains are not prepared for such a rapid recovery in business activity and consumer demand.
The pushback was prompted by the Biden administration’s impressive $1.9 trillion COVID-19 relief package, with most American families receiving thousands of dollars in direct support from the federal government. Tom Siomades, chief investment officer at AE Wealth Management, said the stimulus was over the top given the general economic conditions in US households. Speaking to Cointelegraph, he noted:
“The $1.9 trillion CARES Act in March, when Americans had already saved 20%, pumped more money into the economy than it could handle. This money allowed people who would otherwise go back to work to rethink their options. The shortage of workers, which This in turn led to demands for higher wages, which led to higher costs and prices.”
Some economists point to a more subtle factor: the alarming use of US corporate pricing. “Manufacturers now know that people can pay more and are reluctant to accept lower prices for their products,” Siomades explains.
Now that inflation is a major political issue for the Democratic Party, all eyes are on the Federal Reserve’s efforts to address it. The inflationary wave is likely to decline gradually, if not to pre-pandemic levels, then at least to more moderate levels by the end of the year. However, with rising prices becoming a growing public concern, both individuals and investment professionals have started looking for a safe haven for their money – and that’s where Bitcoin comes in.
Bitcoin as the ‘new gold’
As Bitcoin and the cryptocurrency sector become more and more popular every year, comparisons to gold in terms of potential as a reserve asset are becoming more and more frequent. Many observers suggest that Bitcoin may be more attractive in this regard than the precious metal. In November 2021, the leading cryptocurrency was up 133% year-over-year against gold by just 4%.
As Milton “Todd” Ault III, founder and CEO of investment firm BitNile Holdings points out, over the past 13 years, Bitcoin has significantly outperformed inflation in the US, not least due to the deflationary characteristics of the asset. Olt commented on Cointelegraph:
“What makes it such a great value and an inflation hedge is that it comes at a cost to mine; that would be just $21 million worth of bitcoin. This means that there are a limited number of bitcoins that have to be mined […] It is still the standard security people have in mind.” Traditionally, supply is limited and even in the current economic climate it will still be required.”
Unlike gold, bitcoin lacks the main characteristics of a predictable asset with low volatility. This may not be a big deal for a devoted hedgehog who holds diamond hands and believes in the ultimate financial control of Bitcoin, but for someone who has invested a significant portion of their personal savings as an inflation hedge, the unpredictability can be worrisome. Sabotage In both cases, the fluctuations in the price of bitcoin contrast sharply with the relative stability of gold, which serves not as a multiplier of wealth but as a store of purchasing power.
“Theoretically, bitcoin should be a good hedge against inflation because the number of tokens that can be redeemed is limited. This creates the kind of scarcity that can help it retain its value over time compared to fiat currencies,” Cointelegraph explained. Investment advisory firm The Motley Fool.However, Bitcoin can only be a store of value if a large number of people consider it valuable.Brockmann added: