Bitcoin losing status as inflation hedge, analysts say
By Robert Davis
17:12, 3 December 2021
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Bitcoin is in danger of losing its status as the preferred hedge against inflation, according to some analysts and asset managers.
Crypto enthusiasts often argue that Bitcoin is the perfect hedge because of its limited supply. Therefore, it can’t be devalued because of increased production.
And many investors have bought into this philosophy. For example, Bitcoin reached its $69,000 mark just minutes after the latest US inflation report released on 10 November showed the US consumer price index (CPI) climbed to a 30-year high.
But some analysts note that ongoing regulatory and macroeconomic policy concerns are putting downward pressure on the asset class at a time of persistent inflation. They also note that these pressures are skewing the limited data used to judge Bitcoin’s effectiveness as a hedge.
One of the main macroeconomic concerns for the crypto market is the US Federal Reserve Bank’s hawkish stance on inflation, according to a research note published by analyst Genevieve Yeoh and Joo Kian at Delphi Digital.
The central bank that once described inflation as “transitory” reversed course on 30 November when Chair Jerome Powell told the US Senate Banking Committee that rising rising may persist longer than the initial projections showed.
Powell also told lawmakers that the central bank is considering reducing its bond purchases at an accelerated pace. Yeoh and Kian say this has already caused the market to “price in expectations for tighter monetary policy” and rising interest rates.
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Kian says crypto investors should be concerned about rising interest rates because they can gauge investor appetite for risky asset classes.
The Fed’s bond purchase taper could increase interest rates, which could coincide with decreased investor demand for highly volatile assets like cryptocurrencies as investors seek shelter, Kian wrote in a note published on 24 November.
However, trading data from Binance shows that interest in cryptocurrencies remains strong despite the steady increase of the benchmark 10-year Treasury bond yield over the past few weeks.
The notional value of open interest in Bitcoin was more than $3.6bn by 16:25 UTC, the data shows. However, short interest in Bitcoin has risen over the last month and accounted for 47% of the positions taken on Binance on 2 December, the data shows.
To Karan Sood, a portfolio manager at CBOE Vest, Bitcoin was seemingly designed with today’s economic challenges in mind because of its limited supply. This makes it like other traditional inflation hedges such as gold and silver because Bitcoin’s cost of production is so high.
What makes the digital asset class different from other asset classes is its relative newness when compared to other hedges like gold, Sood says. This relative data imbalance favours traditional commodities, but that may change as more data is acquired, Sood adds.
Because of this lack of data, Sood says investors should approach their digital holdings like they would for other volatile assets during inflationary periods.
“Most investors move away from Bitcoin during inflationary periods because of its volatility,” Sood told Capital.com. “This is the same theoretical approach used to manage other volatile assets, so it makes sense to apply it in this case.”
So far this year, Bitcoin has returned more than 93% to its investors while gold has lost 3% of its value.