- Bitcoin looks good as an inflation hedge because it jumped when the huge CPI data appeared in October.
- But then the token reminded everyone why many investors are turning to clarity: it plummeted by nearly 20%.
- Many large companies have stated that Bitcoin is still too risky to be considered as a way of hedging or diversification.
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When the shocking October inflation data first appeared on traders’ screens, it showed that U.S. prices were rising at the fastest rate in 31 years. Bitcoin goes higher.
For many crypto enthusiasts, the proceeds of the tokens confirm their long-standing argument: Bitcoin It is a new inflation hedging tool. It is the “digital gold” of the 21st century and will soon become the main diversification tool for global investment portfolios.
But in the past few days, when the Bitcoin price plunged 18% from the historical high of more than $68,600 (1 million rand) set on November 10, this logic continued some fierce firepower. Less than 56,000 USD (R881,000) Friday.
James Malcolm, a top foreign exchange strategist at investment bank UBS, said the inflation hedging narrative “should be accompanied by some very important warnings”. “This is not a sound way of thinking.”
Digital gold
Although Bitcoin was originally intended to be a digital version of cash, cryptocurrency investors are more likely to tell you that it is digital gold today.
Like precious metals, Bitcoin has a limited supply. There should be only 21 million coins minted, and 18.9 million coins already exist. In the long run, this scarcity should help cryptocurrencies maintain their value, or the argument goes like this, even if other assets are vacillating in the face of inflation or other terrible issues.
In the past few months, this view has heated up.When Bitcoin climbed in October, JPMorgan Chase analyst Nikolaos Panigirtzoglou stated in a report “perception” Tokens are a key factor as an inflation hedge. Then when the inflation data came out, its price soared, making the crowd happy that Bitcoin is digital gold.
Many drivers
But then Bitcoin reminded everyone why most major investors avoided it-it plummeted.
UBS strategist Malcolm said the sharp drop is a reminder that there are many other factors driving the token. “Inflation is one of many demand-side factors,” he said. “This is just one of the current popular ones.”
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A key issue facing major institutions is that Bitcoin has a lot of risks, and assets such as gold do not face such risks.
Malcolm pointed to regulation, believing that it could significantly slow down the rate of adoption, which could hurt prices. “This should make it a very bad inflation hedge. In a sense, inflation may continue to rise, while cryptocurrencies may fall more for various other reasons,” he said.
Bitcoin is “too primitive”
Proponents of the digital gold argument point out that Bitcoin rose sharply last year, when inflation also rose sharply.
However, skeptics believe that investors cannot expect this trend to continue.If the past plot can be passed, Bitcoin may fall into another situation similar to 2018 “winter” at any time. At that time, its price fell from approximately US$20,000 (R314,000) at the end of 2017 to below US$4,000 (R62,000) a year later.
Catherine Doyle, a strategist at BNY Mellon Investment Management, said that she thinks Bitcoin is more like a “risky” asset such as stocks. “It will not be part of the stable foundation [in a portfolio],” she said. “It just feels too speculative, too primitive. “
However, it must be pointed out that Bitcoin was only born in 2009. Even some of its biggest skeptics admit that it may become an inflation hedge, especially if investors begin to truly believe in it. JP Morgan’s Panigirtzoglou has stated that the competition between Bitcoin and gold will continue to exist among investors “without a doubt”.
But in the eyes of many big players, it’s still far away. On the contrary, it is an asset that has soared for a variety of reasons-and can easily collapse again.
