When Satoshi Nakamoto invented Bitcoin in 2008, his main goal was to provide an alternative decentralized payment system but will be used just like traditional currencies. The digital asset was first used as payment in May 2020 when Laszlo Hanyecz, a man from Florida paid 10,000 Bitcoins for two Papa John’s pizzas.
Today, more than 15,000 businesses worldwide are now accepting Bitcoin as payment. These businesses include top companies like Microsoft, Paypal, Whole Foods, Etsy, Starbucks, Newegg, Overstock, Home Depot, and Rakuten.
The adoption by giant companies worldwide has paved the way for its adoption on a national level. El Salvador was the first country to adopt BTC (bitcoin) as legal tender. The country’s adoption was to give access to a majority of Salvadorans that have no access to banking facilities.
In a recent report, Ukraine has become the latest country to legalize cryptocurrency primarily to create a transparent market and to prevent crypto fraud. According to reports, Panama is also eyeing to legalize cryptocurrencies with the same model as El Salvador. Panamanian congressman Gabriel Silva stated in a tweet that for the country to become a true technology and entrepreneurship hub, it has to embrace cryptocurrencies.
There has been a growing interest in adopting cryptocurrencies in Latin American countries.
In August, Argentina President Alberto Fernandez in an interview expressed that he is open to adopting BTC (bitcoin) as legal tender. He also recognized the increasing perceptions of bitcoin as a hedge against inflation. In a country with a more than 50% inflation rate, can bitcoin provide a solution?
A Hedge to Inflation
An asset can be considered as a hedge if it maintains or increases its value at the same time protecting it against price fluctuation.
Inflation on the other hand is the decline of a currency’s purchasing power. When inflation is extremely high and at an accelerated pace like prices are rising rapidly and generally at an increasing pace an economy is undergoing hyperinflation which may result in social upheaval and civil unrest.
Although inflation is a healthy phenomenon of a healthy economy, holding your cash may not be wise since it may lose its purchasing power over time. This is why investors turn to stocks, bonds, precious metals (i.e. gold and silver), and bitcoin, and other cryptos which are a store of value.
An asset can be considered as a store of value if it can maintain its value and does not depreciate. Instead, it increases its purchasing power with the passing of time. And bitcoin has been touted as a store of value. Founder and CEO of Microstrategy Michael Saylor, one of the biggest proponents of crypto believes that Bitcoin is a store of value.
In June, the Lebanese pound plunged against the US dollar reaching a new low at a conversion rate of 15,150 to 1 USD. In a tweet, Saylor strongly advised them to turn Bitcoin as a solution to monetary devaluation.
— Michael Saylor⚡️ (@saylor) June 13, 2021
With a finite supply of 21 million, bitcoin is also scarce just like precious metal gold. With the increasing number of investors that view bitcoin as a hedge, the demand for the digital asset has also increased driving its price upward. Bitcoin is now referred to as “the digital gold.”
Some investors even shifted from precious metal to bitcoin. A conducted survey in February revealed that Australians that have ventured into crypto particularly bitcoin have surpassed the number of investors for investments like gold and silver. 12.6% of Aussie investors hold bitcoin as compared to 12.1% for precious metals.
In February, the Bank of Singapore admitted that cryptocurrency gains have surpassed gold and the Dow Jones stock market ten times in 2020 after its value increased by 300%. The bank even believes that bitcoin could soon replace gold as a haven asset.
Data by Forbes in November 2020 showed that millennials preferred bitcoin over gold for their portfolio. Nate Geraci, president of the ETF Store commented on this.
“When we talk to our younger clients – we have a core gold allocation in our portfolios, and they’ll ask about that and say, ‘What about crypto?’ And if you talk to, primarily millennials, and ask them which they prefer, bitcoin or gold, it’s a landslide. It’s not even close, it’s like 90% prefer bitcoin.”
In April, the son of gold bug Peter Schiff sold all his silver holdings and used the proceeds to buy bitcoin making him a 100% hodler of the cryptocurrency. But this didn’t sit well with his father who is a known critic of bitcoin. The old Schiff stated that his son has been brainwashed.
An adoption after another adoption has resulted in an increase in the price of the most dominant cryptocurrency. But how can a volatile asset with its fluctuating value like Bitcoin be considered as a hedge against inflation?
Bitcoin Solution: A Mere Illusion?
Although there has been a growing number of believers that bitcoin is a hedge against inflation, the crypto community has been divided whether it can really respond as one.
“Expectation postponed makes the heart sick,” a proverb says. Could this also be true about bitcoin?
In the United States, Consumer Price Index recorded its largest increase in one-month increase in June in the past 13 years according to a report by the Business Insider. Inflation climbed by 2.6% in March until reaching 5.6% in June. But bitcoin lost almost 50% of its value when its price nosedive to $30K after recording an all-time high at $64K in May. Ed Moya, senior equity analyst at foreign exchange firm Oanda stated that this is contrary to what is supposed to be: a hedge to inflation.
“Bitcoin isn’t behaving like an inflation hedge anymore and will continue to remain heavy over expectations over higher yields.”
Some crypto experts have also stated that bitcoin is not a hedge against inflation. Founder of money management firm Quantum Economics, Mati Greenspan in his statement with Cointelegraph stated that there “doesn’t seem to be any correlation” between Bitcoin’s price action and inflation or deflation data. He further stated:
“Certainly Bitcoin has been a great performer over time. But most of the gains have occurred during a great global deflationary period in which all risk assets rose. Now that inflation is picking up for real, for the first time since Bitcoin’s inception, it’s drastically underperforming.”
Black Swan author Nassim Taleb in his statement with CNBC stated that bitcoin failed as a hedge. He has also favored gold over bitcoin stating:
“gold and other precious metals are largely maintenance-free, do not degrade over a historical horizon, and do not require maintenance to refresh their physical properties over time”
Taleb also cited in March 2020 the digital asset price suffered more than the stock market and later recovered with it upon the massive injection of liquidity. He further stated:
“That’s sufficient evidence that it cannot remotely be used as a tail hedge against systemic risk.”
Some bitcoin proponents have argued that their Bitcoin investment and profits “have already hedged the future” and they also pointed out the remarkable growth of the digital asset and is due for massive gains in the long run.
With bitcoin’s volatility and crazy price swings, the world will continue to be divided whether cryptocurrency is really a hedge to inflation or just a mere illusion.
A recent report by JP Morgan revealed that with the re-emergence of inflation, institutional investors have chosen BTC (bitcoin) over gold as a hedge.
The re-emergence of inflation concerns among investors has renewed interest in the usage of Bitcoin as an inflation hedge. Institutional investors appear to be returning to Bitcoin perhaps seeing it as a better inflation hedge than gold.”
The recent event has increased the price of cryptocurrency and even resulted in a price rally after breaching the $50K mark and finally reclaiming its $1T market cap. Today, BTC (bitcoin) has breached the $60K mark with its price at $63,878 in recent data by Crypto.co. With its current price, it’s just a matter of time before it reaches its previous all-time high of almost $65K. The increased adoption by institutional investors of bitcoin will definitely push its price even higher and will strengthen its position as a hedge against inflation.