Why Bitcoin Doesn’t Appear to Be a Hedge Against Inflation

Bitcoin has fallen in value this year, weakening the argument often made by crypto enthusiasts that it can be an effective hedge against inflation during times of economic turmoil.

Proponents of Bitcoin have long argued that its scarcity would protect its value in times of rising inflation. Unlike central banks – which can increase the money supply – there is a fixed number of currencies, which keeps them scarce.

Even before the market crashed, there was debate about whether bitcoin would hold its value. Billionaire investor Paul Tudor Jones was optimistic about bitcoin as an inflation hedge, while Dallas Mavericks owner and investor Mark Cuban dismissed the idea as a “marketing slogan.”

Another argument is that bitcoin, along with other similar cryptocurrencies, will have an intrinsic store of value over time as it becomes more accepted, like gold. Supporters believe it will be seen as an asset that will not depreciate over time.

However, this has not been proven, at least not yet. The value of the cryptocurrency market has generally plummeted along with rising inflation, with bitcoin losing half of its value since January. As of Friday, the price of bitcoin is $21,833, according to Coin Metrics.

With crypto, “the magnitude of [price] volatility is so great that it’s very difficult for me to see it as a long-term store of value,” Anjali Jariwala, certified financial planner and founder of Fit Advisors, told CNBC Make It.

Jariwala says crypto in general is a new type of asset that does not yet function as a sought-after commodity like gold, or even as a currency, “because it cannot be easily exchanged for a good or service.” Despite its scarcity, the price of a cryptocurrency like bitcoin is still largely based on consumer confidence, she says.

“It’s tricky because it’s supposed to work like a currency, it’s taxed as property and some people compare it to a commodity. In the end, it’s really its own asset class that doesn’t have a clean definition.”

Another consideration is that cryptocurrencies like bitcoin have only been around for a little over a decade. Therefore, “there is not enough history in terms of historical records to really understand what it serves as an investment for,” says Jariwala.

While cryptocurrencies like bitcoin are “unproven” as a reliable long-term store of value, they can still be accepted over time and become less volatile, Omid Malekan, an adjunct professor at Columbia Business School specializing in crypto and blockchain technology, said. tells CNBC Make It.

“Once volatility levels off, we’ll have a better picture of how it reacts to macro developments, like inflation or what the Fed is doing,” he says, warning that current crypto prices could reflect all sorts of inputs aside from inflation, such as too many overleveraged cryptocurrency lenders or a lack of regulation.

Regardless, crypto as a whole remains a highly speculative investment. Jariwala recommends investing only with money you are willing to lose. She also says to view crypto investing as a long-term strategy and “stick with that strategy even in times like these”.

Cryptocurrency can evolve into a more mature asset that can act as a hedge against inflation. But “we just don’t know until we see more of a track history with it,” says Jariwala.

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