Bitcoin looked good as an inflation hedge – then it crashed nearly 20% | Currency News | Financial and business news

Bitcoin rose dramatically in 2021 but is very volatile.

REUTERS / Dado Ruvic

• Bitcoin looked good as an inflation hedge as it jumped when huge CPI pressures came through in October.
• But then the token reminded everyone why many investors steer clear: it slumped by almost 20%.
• Many big players say Bitcoin is still far too risky to be viewed as a hedge or diversification option.

When the shocking October inflation numbers first flashed on traders’ screens, showing that US prices had risen at the fastest rate in 31 years, Bitcoin skyrocketed.

For many crypto fans, the token’s gains confirmed what they had long argued: Bitcoin is the new inflation protection on the block, and it is “digital gold” for the 21st century that will soon be a major diversifier in portfolios around the world will be.

But that logic has received quite a bit of fire in the last few days as Bitcoin price fell 18%, from a record high of over $ 68,600 on November 10th to below $ 56,000 on Friday.

The inflation hedge narrative “should come with some very big caveats,” said James Malcolm, a top currency strategist at investment bank UBS. “It’s not a robust way of thinking about things.”

Digital gold

Although Bitcoin was originally intended to be a digital version of cash, these days crypto investors are more likely to say that it is digital gold.

As with precious metal, there is only a limited amount of Bitcoin. Only 21 million coins should ever be minted, 18.9 million already exist. That scarcity should help cryptocurrency hold its value over the long term, the argument goes, even as other assets wobble in the face of inflation or other frightening issues.

The view has picked up pace in the past few months. When Bitcoin climbed in October, JPMorgan analyst Nikolaos Panigirtzoglou said in a note that “the perception” that the token was an inflation hedge was a key factor. Then the price soared as the inflation numbers came through, delighting the Bitcoin-is-digital-gold crowd.

Lots of drivers

But then Bitcoin reminded everyone why most big investors stay away from it – it crashed.

Malcolm, the UBS strategist, said the sharp drop is a reminder that there are many other things that are driving the token. “Inflation is one of many demand-side factors,” he said. “Right now it’s just a popular one.”

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A key problem for large institutions is that Bitcoin brings with it a multitude of risks that an asset like gold is not exposed to.

Malcolm points to regulation, arguing that it could greatly slow down adoption, which in turn could drive up the price. “That should make it a very poor inflation hedge. In the sense that for all sorts of other reasons, inflation can keep going up and crypto can go down a lot more, ”he said.

Bitcoin is “too raw”

Proponents of the digital gold argument point out that Bitcoin has risen sharply in the past year, as inflation has risen dramatically.

However, skeptics argue that investors cannot rely on this trend to continue. If you can orientate yourself on past episodes, Bitcoin could fall into another 2018-like “winter” at any time. At the time, the price dropped from around $ 20,000 in late 2017 to below $ 4,000 a year later.

Catherine Doyle, strategist at BNY Mellon Investment Management, said she viewed Bitcoin as more of a “high risk” asset like stocks. “It would not be part of this stabilizing basis [in a portfolio]”she said.” It just feels too speculative and too raw.

However, it must be said that Bitcoin was only created in 2009. Even some of its biggest skeptics admit that it could still become an inflation hedge, especially if investors start to really believe it. JPMorgan’s Panigirtzoglou said there was “little doubt” that bitcoin’s competition with gold will continue among investors.

But in the eyes of many big players, it is still a long way from that. Rather, it’s an asset that has skyrocketed for a number of reasons – and which could easily collapse again.