Bitcoin Looked Good As A Hedge Against Inflation – Then It Dipped Almost 20% | Currency News | Financial and business news

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Bitcoin has grown significantly in 2021 but is very volatile.

REUTERS / Dado Ruvic

Bitcoin looked good as an inflation hedge as it surged when the huge October CPI impression emerged. But then the token reminded everyone why many investors are clear: it has plunged almost 20%. Many big players say bitcoin is still far too risky to be seen as a hedge or a way to diversify.

When the shocking October inflation figures first appeared on the screens of traders, showing that U.S. prices were rising at the fastest rate in 31 years, bitcoin soared.

For many crypto fans, the token’s gains confirmed what they had long held: Bitcoin is the new inflation hedge on the block, and it’s ‘digital gold’ for the 21st century that will soon be a key element in the diversification of portfolios around the world.

But that logic has come under heavy fire in recent days as the price of bitcoin plunged 18% from a record high of over $ 68,600 on November 10 to less than $ 56,000 on Friday. .

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

Digital gold

Although bitcoin was originally intended to be a digital version of money, these days crypto investors are more likely to tell you that it is digital gold.

Like the precious metal, the supply of bitcoin is limited. Only 21 million coins are supposed to be minted, of which 18.9 million already exist. This scarcity should help the cryptocurrency to hold its value for the long term, or so they say, even if other assets falter in the face of inflation or other frightening issues.

The sight has gained momentum in recent months. When bitcoin surged in October, JPMorgan analyst Nikolaos Panigirtzoglou said in a note that the “perception” that the token is a hedge against inflation was a key factor. Then, its price skyrocketed when the inflation numbers surfaced, delighting the bitcoin-is-digital-gold crowd.

Many drivers

But then bitcoin reminded everyone why most big investors are deviating from it – it took a plunge.

UBS strategist Malcolm said the sharp drop is a reminder that there are plenty of other factors behind the token. “Inflation is one of the many factors related to demand,” he said. “It’s just popular right now.”

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A key problem for large institutions is that there are a large number of risks surrounding bitcoin that an asset like gold does not face.

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

Bitcoin is “too raw”

Supporters of the digital gold argument point out that bitcoin has risen sharply over the past year, when inflation has also increased dramatically.

Still, skeptics argue that investors cannot count on this trend continuing. If past episodes are to happen, bitcoin could drop into another 2018-like “winter” at any time. At the time, its price dropped from around $ 20,000 at the end of 2017 to less than $ 4,000 a year. later.

Catherine Doyle, strategist at BNY Mellon Investment Management, said she sees bitcoin as a “risky” asset like stocks. “It would not be part of this stabilizing base [in a portfolio]”She said.” It sounds too speculative and too crude. “

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

But in the eyes of many great players, it is still a long way off. Rather, it is an asset that is skyrocketing for many reasons – and one that could easily fall apart again.

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