bitcoin

Bitcoin’s ‘Inflation Hedge’ Case Is Dead; The crypto leader is heading towards $12,000


Ladies and gentlemen, I hate to say this, but bitcoin
BTC
is not digital gold and the case for investing bitcoin as an inflation hedge is dead. If you think the $20,000 price is back, wait until you see $12,000.

We all wanted Goldman Sachs to be right when they called bitcoin digital gold. But like their call in 2008 that oil was going to $200 a barrel, sometimes the best minds are wrong.

Historic inflation is driving up the price of food and fuel, among other things. Some stocks benefited as the market bet that the Fed wouldn’t dare raise interest rates in the midst of a technical recession (the US economy has contracted for two consecutive quarters, the definition of a technical recession). Stocks performed well on this bet. Although the S&P 500 has been down since the start of the year, it is much better than bitcoin. In fact, the whole cryptocurrency market is a dud. Some NFTs are down 85%. Buying low is like that old adage – “never catch a falling knife”.

Bitcoin, with its supply capped at 21 million coins, and Goldman Sachs’ “store of value” thesis (digital gold), meant no. 1 cryptocurrency traded was meant to be an inflation hedge.

“Bitcoin is not immune to macroeconomic factors,” says Andrei Grachev, managing partner at DWF Labs, a web 3.0 investor based in Zug, Switzerland. “Continued factors such as the Federal Reserve’s interest rate decision have significantly affected market sentiment, and market uncertainty means investors will turn to lower risk assets. Unfortunately, bitcoin is still considered a newer and more volatile asset to be a hedge, but I think Bitcoin is still going to be a very profitable asset for medium to long term investors.

Unlike crypto investors of the past who wanted to “hodl” bitcoin forever, large investors are more likely to sell bitcoin now when markets turn defensive.

Bitcoin: be on the defensive

Being defensive about bitcoin basically means, don’t buy it. If you’re not buying the Nasdaq, definitely don’t buy bitcoin. Build up liquidity and wait for it to drop further, because everyone is convinced that it does.

Bitcoin tech stock correlation is complete. “Crypto’s main movers are always dedicated long-term holders,” says Przemysław Kral, CEO of Zonda, a cryptocurrency exchange based in Tallinn, Estonia, who believes Nasdaq’s correlation with bitcoin is a thing of the past. .

Last year and into early 2022 bitcoin followed the Nasdaq rather than acting as inflation hedge assets like gold. The value of Bitcoin should, in theory, be uncorrelated to the stock market. One has nothing to do with the other.

“The fact that bitcoin’s price is so correlated to financial markets indicates that we are still a long way from Satoshi’s vision of decentralization,” says Abraham Piha, co-founder and CEO of Tomi.com, a cloud computing solutions provider. solutions for companies building the third generation of the Internet – the blockchain space – better known as Web 3.0.

“The (cryptocurrency) market is still quite centralized and controlled by hedge funds on Wall Street, and their liquidity is hurting all of us,” Piha says from his office in New York. “Only when we achieve true decentralization will Bitcoin be a hedge against inflation and a true store of value. Right now the only real benefit is that it is an asset. which no one can take from its owner.

Billionaire investor Paul Tudor Jones called Bitcoin an inflation hedge last year. Mark Cuban dismissed the idea, calling it a “marketing slogan” for bitcoin enthusiasts. Cuban was right.

What’s going on?

Since the birth of bitcoin, we have been living in an era of low interest rates that encourage investors and speculators to put their money in risky assets. Nothing is riskier than cryptocurrency. Maybe slots and roulette are more risky.

Inflation does not help Bitcoin

The recent decline in crypto prices is not really driven by inflation, but by raising interest rates to clean up excess liquidity in the market, quell inflation, and strengthen the US dollar due of rising rates. Rising interest rates mean higher Treasury yields, attracting buyers of foreign bonds from low-yielding countries like Japan and Europe. Leveraged Bitcoin bets were also cashed out.

Bitcoin hasn’t been around long enough to prove whether it’s truly an inflation hedge and a store of value. Despite its rarity, the price of a cryptocurrency like bitcoin is still primarily based on investor sentiment. It could still be accepted over time and become less volatile, but that hasn’t happened despite some small headlines about companies accepting bitcoin for payment. This is especially true today in high-end real estate, often a delight for money launderers, making bitcoin the perfect partner for luxury skyscrapers in Miami and Dubai.

“If you zoom out over the past decade, you can see bitcoin has performed better than most traditional stocks,” says Irina Berezina, Lisbon, Portugal-based COO of Uplift. DAO, a platform for cryptocurrency startups. She pointed to Blackrock’s recent foray into bitcoin. They created a fund for their wealthy clients.

If BlackRock
noir
began to inject customers’ money into this fund, it’s a money pit. Bitcoin was trading flat on Thursday evening. The bulls are looking for a break.

Bitcoin bears support. Until when?

The digital gold story does not work. The inflation hedge story doesn’t work. Bitcoin is a crypto Nasdaq does not work.

That could change. Remember that the last time bitcoin fell below $10,000, it spent the next 12 months climbing around $60,000.

“Rather than inflation, bitcoin is a hedge against currency depreciation and, in its mature state, provides an alternative to central banking,” says Ben Caselin, head of research and strategy at AAX Hong Kong. . “In places like Argentina, Turkey, Nigeria, or other countries where inflation has been high for decades, there is no doubting Bitcoin’s ability to act as a hedge against the inflation.”

Unfortunately, El Salvador’s experiment with bitcoin as legal tender seems to have hit a wall. bitcoin as an alternative to fiat is barely successful.

Bulls like Caselin focus on bitcoin’s long-term story.

But in the short term, they see bitcoin losing that strong correlation with the stock market. Over the past two weeks, investors have sold off the S&P 500. Bitcoin fell sharply on August 19 but has since caught up with the S&P. In the past five days ending Labor Day, bitcoin is down 1.1% and the SPDR S&P 500 (
TO SPY
) ETF fell 2.6%.

One thing in Bitcoin’s favor is the currency market. The euro, pound and yen are at decade lows against the dollar.

“The dollar index is moving a lot in one direction and only one direction, and that’s going up. Usually when the dollar index gets that much strength, we normally see the price of Bitcoin falling,” says Naeem Aslam , chief market strategist for AvaTrade in London, “The bulls are holding their ground. They didn’t allow the Bitcoin price to take a beating because of the tech selloff and a strong dollar,” he says.

If there is a downside capitulation now that Bitcoin is above $20,000, the next move will not be at the $18,000 or $15,000 price level; the sell-off could be so intense that it could quickly bring Bitcoin closer to $12,000, Aslam predicts.

“My general view is that the crypto winter will get worse before it gets better. Most professional traders I talk to are looking for 10,000 rather than 30,000 in Bitcoin. Buy-side demand is very limited at the moment,” says Lars Seier Christensen, Chairman of the Concordium Foundation and Founder of Saxo Bank. “The Ethereum merger is unlikely to instill any real bullish sentiment in the market, as the reality is that it’s not changing much.”

Alas, with economies looking weak due to inflation in Europe and increased interest in Western economies, Bitcoin has failed to live up to its hype as a crypto inflation hedge.

Once it has gone through a few market cycles, investors will have a better understanding of how Bitcoin reacts to macroeconomic developments.

“There is a strong relationship between the Bitcoin price and the dollar,” Caselin says. “The dollar has shown strength in recent months, so a decline in the dollar could trigger a rally in Bitcoin in the short term. But going forward, it’s more interesting for me to watch how Bitcoin and digital assets take root in emerging markets based on use cases. Over time, such widespread adoption will stabilize Bitcoin’s growth and change the dynamic between crypto and traditional markets.

* The author owns Bitcoin.


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