Since inflation is an inevitability in fiat-based economies, specialists and even common people have been hunting for a hedge investment or instrument. Investors who are always concerned about their money depreciating due to inflation have historically found solace in gold, stocks, and real estate. However, commodities like gold and silver, have recently been perceived as being less dependable over short investment horizons.
One of the major focal points for Bitcoin is that it is an inflation hedge, suggesting that its value will remain stable over time. One explanation is that the cryptocurrency’s supply is limited to 21 million units, which leads to scarcity as demand rises. This concept has been tested during the recent inflation now ranging at over 10% and this guide will explain whether or not BTC is still an inflation hedge.
Inflation: What is it?
When the value of the local currency plummets, there is inflation. The Consumer Price Index is a well-liked inflation indicator (CPI).
Rising prices for products and services that reduce the local currency’s purchasing power are referred to as inflation. As a result, more of a currency’s units are required to buy a certain item.
Bitcoin Price Prediction
The price of the cryptocurrency Bitcoin has dropped from about $70,000 to about $21,000, according to a recent analysis, wiping out the whole crypto industry in the process.
As the market as whole gears up for a probable “crypto-winter” of further price declines and stagnation, analysts’ bitcoin price prediction suggests the currency, which some have termed “digital gold,” will continue to experience significant losses.
Surprisingly, Bitcoin had outpaced the stock market and gold for the third year in a row by 2021.
Institutional investors used Bitcoin as a hedge against inflation during the COVID-19 outbreak because they were concerned that increased government expenditure would cause hyperinflation.
BTC’s Correlation with S&P 500 Undermines BTC as an Inflation Hedge
According to analysts, Bitcoin hasn’t been as effective as an inflation hedge recently.
The reality that the financial sector is beginning to accept Bitcoin is one potential explanation for why it isn’t as good of a hedge as it once was. Since there are already Bitcoin futures, options, and ETFs, as well as large institutions buying Bitcoin, there is a growing link between Bitcoin and other conventional financial assets.
Instead, according to BofA analysts Alkesh Shah and Andrew Moss in the research, Bitcoin trades as a risk asset and has done so since July 2021. They cited data demonstrating that the cryptocurrency frequently swings in lockstep with the stock market.
Based on their movements over the preceding 180 days, the correlation between Bitcoin and the S&P 500 reached an all-time high on January 31. The pair have been in sync in the current macro environment. For instance, Bitcoin’s value fell along with stocks in a selloff that is still going on today after the Federal Reserve announced it would increase interest rates by half a percentage point on Thursday. Analysts anticipate that this correlation will endure the tests of time.
Additionally, as a reliable store of wealth, gold and bitcoin are frequently contrasted. However, the connection between Bitcoin and gold (XAU) has been near to zero since June 2021 and has gotten increasingly negative over the last two months, according to the research, indicating that the price of Bitcoin hasn’t been fluctuating in lockstep with the price of gold.
BTC May Not be a Safe Haven
The conflict in Ukraine, general economic unrest, and the demise of the Terra stablecoin are just a few of the events that have prompted increasingly pessimistic attitudes concerning Bitcoin. Bitcoin’s relative age in the market, together with its volatility and doubts about its underlying value, have likely contributed to some experts’ skepticism.
Inflation has also had a major impact, with rates skyrocketing in both the United States and the rest of the world.
The risks of investing in cryptocurrencies are widely known; nonetheless, many people still view Bitcoin and the larger crypto market as dangerous bets.
However, given that inflation continues to dominate news, the general perception of Bitcoin frequently vacillates between being valuable and being useless. These storylines may not be helpful to someone trying to invest.
How to Invest to Prevent Inflation
Even while inflation is typically seen as a sign of a strong economy, it is frequently unwise for consumers to cling to their cash reserves because cash loses purchasing power over time.
Due to this, many market players are investing their hard-earned money in investments that have a store of value, such as stocks, bonds, and cryptocurrencies like bitcoin or precious metals, among others.
If you’re not acquainted, an asset must be expected to maintain its purchasing power over time, which means that it must either gain in value or remain steady, in order to qualify as a store of value.
Cryptocurrencies may follow suit if the market climate improves, with US stock indexes staging a return and trading in the green for the fourth straight session.
Without a question, interest in Bitcoin’s potential utility in terms of money and in larger payment networks has grown globally.
Widespread institutional and retail buy-in has resulted from the conversation’s tone, and many people are confident that it will produce the results they are hoping for. The debate over whether it is a good inflation hedge may resurface if that momentum strengthens or perhaps surpasses its earlier highs.
The jury appears to be deadlocked for the time being.