The rich get richer: Rethinking Bitcoin’s power as an inflation hedge

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From turkey to gasoline, from clothes to dollar stores, almost every avenue of human activity has been haunted by the ghost of inflation. Around the world, rising inflation rates are disrupting purchasing plans and spending.

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In the face of this inflationary hell, consumers and institutions devaluing fiat currency have looked for alternatives to hedge. Bitcoin and many other cryptocurrencies are the current weapon of choice, prompting the US Securities and Exchange Commission to adopt crypto as a investible asset class,

bitcoin has seen Strong year-on-year returns, outperforming traditional hedges rallying More than 130% compared to gold’s meager 4%. In addition, increased institutional adoption, based on the continued appetite for digital assets weekly inflow And increasing exposure to the media strengthened the case for bitcoin among weary investors.

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If these are tricks made by big money, then they must be clever moves. However, although the prospect of hedging against bitcoin may seem attractive to retail investors, certain question marks remain over its viability in reducing financial risk for individuals.

wrong guess

The ongoing discussion of bitcoin as an inflation hedge needs to be prefaced with the fact that the currency is often susceptible to market shocks and volatility: the value of bitcoin fell by more than 80% during December 2017. . 50% in March 2020 and by another 53% in May 2021.

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Bitcoin’s ability to improve user returns and reduce volatility over the long term has yet to be proven. traditional hedges like gold performance efficacy In preserving purchasing power during periods of persistently high inflation during the 1970s As an example – some have not yet been tested on bitcoins. This increased risk, in turn, makes returns subject to harsh short-term swings that sometimes affect the currency.

It is too early to make a decision about whether bitcoin will be an effective hedge.

Many argue for bitcoin based on the fact that it is designed to have a limited supply, which protects it from devaluation compared to traditional fiat currencies. While this makes sense in theory, the price of bitcoin has been shown to be sensitive to external influences. Bitcoin “whales” are known for their ability to manipulate prices by selling or buying large amounts, meaning that bitcoin can be determined by speculative forces, not just money-supply rules.

Another important consideration is regulation: Bitcoin and other cryptocurrencies are still at the mercy of regulators and jurisdictions have wildly different laws. Anti-competitive laws and short-sighted regulations could significantly hinder adoption of the underlying technology, potentially leading to a further decline in the asset’s price. All this has to say one thing: it is too early to make a decision about whether bitcoin will be an effective hedge.

catering for the rich

Against the backdrop of this debate, another major trend is increasing its momentum. As bitcoin’s popularity grows, it continues to drive adoption and institutionalization of the currency among consumers, including many wealthy individuals and corporations.

A recent survey found that 72% of UK financial advisors Informing their clients about investing in crypto, nearly half of advisors said they believe crypto can be used to diversify a portfolio as an uncorrelated asset.

There has also been a great deal of bitcoin advocacy from prolific individuals known to be technologically progressive, namely the billionaire Wall Street investor. Paul Tudor, Twitter CEO jack dorsey, winklevoss twins And mike novogratz, Even powerful companies like Goldman Sachs And Morgan Stanley have expressed their interest in bitcoin as a viable asset.

If this momentum continues, Bitcoin’s notorious volatility will slowly fade away as more and more wealthy people and institutions hold the currency. Ironically, this accumulation of value on the network would lead to a concentration of wealth – subject to the influence of the elite and exclusive, unlike what Bitcoin was created for. 1%,

In line with classical schools of financial thought, this would actually put retail investors at greater risk, as institutional buying and selling would equate to whale-like market manipulation.

defying the core ethos

The growing popularity of bitcoin will undoubtedly drive more people to own it, and one could argue that the people with the most wealth will be the ones who (as always) own the most.

This noticeable shift of influence between bitcoin and other crypto circles toward ultra-high-net-worth individuals and firms goes against the very ethos that the bitcoin white paper was based on when it was described. peer-to-peer electronic cash system,

in the middle fundamental argument cryptocurrencies require them to be permissionless and resistant to censorship and control by a given institution.

Now, as the 1% wants a bigger slice of the crypto pie, they tend to drive up the prices of these assets in the short term in a way that traditional and less influential retail investors are unable to.

While this move will undoubtedly make some wealthy, it can be argued that it could leave the market at the mercy of the 1%, contrary to the intended vision of bitcoin.

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