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Bitcoin and cryptocurrencies are not a hedge against inflation

September 10, 2020

Federal Reserve Chairman Jerome Powell recently announced that the Federal Reserve will shift its focus from fighting inflation to closing “unemployment deficits”. The Federal Reserve is essentially duplicating the same inflationary policies it experimented with during the 2008 global financial crisis.

Powell said in Jackson Hole recently that the Federal Reserve will not hike rates anytime soon. He also said the Federal Reserve would tolerate higher inflation, deviating from the historical norm of an inflation target of 2%. This cheap money and the policy of higher inflation are taking quantitative easing to a whole new level.

Related: Jerome Powell throws US dollars under bus in Jackson Hole

Bitcoin and cryptocurrencies are not a hedge against inflationBitcoin and cryptocurrencies are not a hedge against inflation

A Federal Reserve study of the Bank of Japan’s practices during its 2013 economic crisis warned that higher inflation targets could lead to “endless tightening of monetary policy even when real economic activity is strong or as savings accumulate.” Risks to financial stability “. The Bank of Japan introduced quantitative and qualitative monetary easing in March 2013 to stimulate the Japanese economy and raise the inflation rate.

After Powell’s Jackson Hole speech, the dollar fell against the euro while gold rose to its 1950 highs. Bitcoin (BTC) has since stabilized; The ether (ETH) has stabilized; and stocks are up again. However, the Federal Reserve will not be able to easily reverse the course of its new policy.

With governments printing infinite amounts of money through bailouts and quantitative expansion, inflation is likely to drive up commodity prices. The Fiat system is clearly imperfect. The crypto media use the danger of inflation to proclaim the advantages of cryptocurrencies. Against the background of a shrinking gross domestic product, an economic slowdown, government bailouts and fiscal incentives, Bitcoin and cryptocurrencies were touted as inflation-resistant hedges. Are you proclaiming it? You should buy Bitcoin as cryptocurrencies act as a hedge for the broken fiat system.

However, Bitcoin is still an emerging technology. In times of economic uncertainty, investors still prefer to use gold and stocks as safe assets. In gold, the SP GSCI gold index rose 7.2% over the last three months of 2018, according to Morningstar, while the stock market fell nearly 14%. Even during the recent bear market, when stocks fell 33%, the gold index only fell 2%. The gold price rose to a record level in the months that followed. However, gold’s volatility can go either way. Nearly a third of fund managers polled in Bank of America’s August 2020 Global Fund Manager survey said gold was overvalued.

From the president of Fidelity filing for a new mutual fund in Bitcoin to billionaire, Bitcoin and Cryptoassets manager Grayscale reports its largest quarterly inflows of nearly $ 1 billion. Institutional demand for Bitcoin has increased in the wake of the COVID-19 pandemic. This institutional attention shows the seriousness with which major players have viewed Bitcoin as an invertible asset.

Institutional money, however, is only just beginning to penetrate the crypto ecosystem, so the market is still relatively immature and fragmented. Cryptocurrencies take more time to grow before they are widely considered a safe asset.

Investors are now using Bitcoin as a store of value, believing that prices will go up compared to fiat money. Be warned: This shouldn’t be your only intention to invest in the cryptocurrency market. If people invest in this area because the financial system is collapsing, we will see unhealthy price spikes followed by a collapse in the crypto index.

In such a scenario, investors will flock to the industry not because of the technology in cryptocurrencies or the deflationary nature of Bitcoin, but rather because of the fear of being left out of the trend. FOMO sufferers believe they should invest like everyone else. We saw this during the ICO mania of 2017, when investors mainly wanted to make money – and not want to invest in cutting edge technology.

Investors and crypto enthusiasts often talk about cryptocurrencies in terms of fiat money, but cryptocurrencies were not intended to be correlated in that way. The intention was to create an alternative to fiat money.

Cryptocurrency enthusiasts are the new hippies of the 21st century. We don’t protest in the street. We are building an alternative. To build it we have to go back to our roots and stop correlating cryptocurrencies with fiat money.

We don’t want the crypto market to grow because the traditional currency system has failed. We want this market to grow because investors demand choice and financial freedom.

This article does not contain any investment recommendations or recommendations. Every trading and investment step is associated with risks. Readers should do their own research in making their decision.

The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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