Bitcoin Faces Hedge Test Amid Growing Inflation Concern






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Inflation, or rather, the perceived threat of inflation, has been very kind to bitcoin (BTC) and crypto. Thanks in part to the US Federal Reserve (Fed) . He pledged to ‘unlimited’ quantitative easing and to Congress that passed the trillion dollar stimulus packages, bitcoin has risen from less than $ 5,000 to more than $ 61,000 in less than a year.

Much of the rise of bitcoin has been driven by institutions and corporations, which have sought to avoid inflation and the weakening of the dollar. The question is: now that some economists are suggesting that the COVID-19 pandemic may actually bring real inflation (and not just the threat), how are bitcoin prices likely to react?

Opinion is largely divided on this issue. Analysts (mainly in cryptocurrencies) estimate that bitcoin will become even more attractive as a hedge against inflation in the coming months (and possibly years), while economists (mostly outside of cryptocurrencies) do not really consider cryptocurrency as a genuine coverage.

Inflated expectations

Opinion is even divided on whether we are likely to witness severe levels of inflation this year, despite a poll recent from the National Association of Business Economists indicates a growing expectation of price increases.

“High unemployment and a sharp drop in economic activity led to very low inflation, sometimes deflation, over the past year. [en los Estados Unidos]. Until life returns to normal and people return to work safely, inflation will remain subdued, ”said economist Claudia Sahm.

In fact, he told that a slow global recovery would put some downward pressure on US inflation, as the prices of imported products would remain low.

On the other hand, Professor Jon Danielsson of the London School of Economics He suggested that even if it doesn’t come in the short term, we are likely to witness inflation sooner or later.

“Inflation is certainly on the rise, and with the money falling from the Biden helicopter and the commitment to keep rates low for quite some time interacting with the post-COVID boom, there is a high risk of inflation in the medium term,” he said.

According to him eToro analyst Simon Peters, we are witnessing an increase in inflation expectations.

“We have seen an example of this recently where inflation expectations in the US have risen and in turn we have seen increases in bond yields. This has been particularly pronounced in the 10-year note, as investors switched from fixed income to assets that benefit from higher inflation conditions, such as energy stocks, ”he told

Consumer price inflation in the United States stood at 1.7% in February, having been 1.4% in January and 1.2% in October. “With inflation persistently below this long-term target, the Committee will try to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and inflation expectations higher. long-term remain well anchored at 2%, “said the Fed. said last March. However, many countries are already experiencing much higher inflation.

Coverage versus no coverage

In any case, opinion is widely divided on whether investors and savers will be increasingly driven towards bitcoin if inflation accelerates.

“We are already starting to see individual investors and corporations moving to bitcoin as a possible hedge against the depreciation of the dollar. Gold used to be the benchmark asset class, however some would argue that it is somewhat outdated because there is no guarantee of a finite supply, ”said Simon Peters.

Expect this process to intensify in the event of an inflation rate significantly above 2%.

“We just have to look at countries like Venezuela, where an economy facing hyperinflation is increasingly adopting bitcoin and other digital assets to pay for everyday goods and services compared to its national currency,” he added.

However, some economists disagree that there is a necessary or natural link between inflation and investing in bitcoins. More influential have been low interest rates and the lack of other profitable investment opportunities.

“I don’t see any reason why fear of inflation should drive people to bitcoin. The stock market provides a natural inflation hedge with lower risk, ”said Jon Danielsson.

Such a view may seem to go against bitcoin price action in recent months, however, Danielsson argues that this has little or nothing to do with inflation.

“I don’t see bitcoin as an inflation hedge. Right now, the price increases are solely due to speculation, and once the speculative fever passes, we could easily see Bitcoin going down and USD inflation rising dramatically, “he added.

There may be something at this point: while companies like MicroStrategy have cited inflation as one of the reasons for buying bitcoins, retail investors are less likely to have been driven by rising consumer prices (at least in countries with low inflation).

At the same time, there is obviously no guarantee that bitcoin will continue to rise in a world of high inflation, particularly if it is the target of regulation.

“First, we could see government or regulatory intervention, making it more difficult or illegal to transact, hold, or extract bitcoins. Second, a flaw or vulnerability in the underlying blockchain could be exploited, ”said Simon Peters, adding that such scenarios would shake confidence in Bitcoin. ( Have more information: these are the ways governments could attack Bitcoin, and none of them sound attractive)

A hedge for the future

Despite much of the current bitcoin craze being driven by a profit motive, the cryptocurrency could potentially emerge as a bona fide inflation hedge in the more distant future.

“The world is changing and we are seeing that younger demographics are more open to exploring technologies or systems that do not have a central authority in control, embracing the idea of ​​a true free market economy,” said Simon Peters.

With younger generations possibly more likely to turn to bitcoin over gold, Peters suggests that the cryptocurrency’s reputation will only get stronger over time.

“As the traction of bitcoin increases as a hedge against inflation, I expect the price of bitcoin to continue to climb, particularly if we continue to see quantitative easing and the printing of new money in economies around the world,” he added.
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