Bitcoin as an Inflation Hedge
By: Morgan Holder, M.B.A. Candidate
With Bitcoin sold as the ideal store of value, with no government regulation, plus a limited supply of 21 million, why haven’t the “store of value” benefits materialized?
Recent Changes in the global Economy
Last week the FED announced three (potentially four) Rate hikes for the year of 2022 and plans to continue hiking rates through the year of 2024. The chief Economist at Goldman Sachs believes the FEDs target Federal Funds rate between 2023 and 2024 will be 2.5%- 2.7%. These will be the highest rates since 2007, when they stood at 5.25%.
As of January 10th, 2022 — Bitcoin, Ethereum and other digital assets have tanked more than 20% in the last month following the release of the FEDs meeting minutes. Before dissecting Bitcoin, its crucial we analyze the looming policy changes from the simple bank and the effects this will have on Risk Assets.
Per the meeting minutes “Regarding the outlook for U.S. monetary policy, expectations for a reduction in policy accommodation shifted forward notably”. With inflation jumping to 39-year highs, the FED has concluded that the U.S. Economy no longer needs aggressive stimulus and will proceed as planned with rate hikes.
The real question is where does that leave Bitcoin? In a time where Fiat is losing value, why haven’t investors seen the benefits? I’m convinced the reasons behind this go beyond inflation. Bitcoin is still a largely speculative asset. And typically, with new asset classes, emotions in the market are running high due to uncertainty. Many feel compelled to take profit at the slightest 5% pull back. In addition, the asset is still at the mercy of regulators. Given that 9 U.S. regulators each have their own angle with digital assets, it makes sense why there is fear among this asset.
Another factor, one that has flown under the radar, that may be driving the price of Crypto down, is the Kazakhstan Uprising. The government of Kazakhstan, in response to Anti Government protests, shutdown the internet. In response to China’s cryptocurrency crackdown, Kazakhstan became the second largest center of bitcoin mining next to the U.S. The result of this has seen the countries hash rate — A measure of computational power to verify transactions — fall to 13%.
The chart below illustrates Bitcoins first true test in a high inflationary environment.
Macro Analysis
Given the current environment and other events unfolding in the global economy, investors must still acknowledge Bitcoins impressive bull run over the past 2 years. While the asset is down from a high of $69,000, it still remains elevated by 535% from the $8,000 range of January 2020. Looking at the macro level for the past 2- 5 years, the store of value has arguably paid off well for investors who held long-term. However, at the micro level, given the volatility, its understandable how investors could question the store of value.
So, the question remains, have our expectations been miscalculated? The answer is one that can only be articulated with time. With quantitative easing coming to an end in the largest economy on earth, one can only wonder how the strength of the global economy will fair after two years of aggressive central bank support. It is simply too early to judge whether or not bitcoin is an effective hedge or not.
