Bitcoin Isn’t Acting Like an Inflation Hedge. Gold Isn’t Either.

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The debate over whether Bitcoin is a speculative asset or an inflation hedge has been put to the test this week, and the evidence so far tends towards the former.

Bitcoin fell along with other risky assets on Thursday as Federal Reserve Chairman Jerome Powell made it clear that the central bank will stick to its accommodative monetary policy even if interest rates begin to rise.

When interest rates rise and signs of inflation show up, investors could try to hedge their risk against inflation – particularly the “money pressures” that are taking place at the Fed. But right now, Bitcoin doesn’t seem like a huge hedge, as suggested by some leaders in finance and business. After climbing above $ 51,000 on Wednesday, Bitcoin fell sharply on Thursday following the Fed’s speech, trading closer to $ 49,000 on Friday.

Of course, rising long-term interest rates aren’t synonymous with inflation, so the current market weakness may not be a fair test for Bitcoin. Inflation has not yet shown itself in the US economy, and it may not happen even with loose monetary policy at the Fed.

Also, the market signals are mixed at the moment – and even downright strange. The dollar has risen, as has oil. The two usually move in opposite directions. Other supposed inflation hedges like gold have also underperformed in the past few days. Gold futures have fallen over the past three days.

Bitcoin may work better as an inflation hedge, or investors may accept it as a means of diversifying their portfolios, even if it’s not a good inflation hedge.

“Bitcoin’s almost complete lack of meaningful correlations with other assets presents Bitcoin as a diversifier. However, given its high volatility, we think that adding it to a portfolio is more about returns than diversification, especially given the headline-making nature of its moves lately. ”Wrote Christopher Louney of RBC Capital Markets in a note explaining why Bitcoin and gold are not a great substitute for each other.

Companies that own Bitcoin or are in the industry have also declined. The

Reinforcement of the ETF for the exchange of transformation data

(Ticker: BLOK), created by Toroso Investments to track some of these companies, is down 13% it’s been over since monday. Michael Venuto, Toroso’s chief investment officer, says investors’ gut reaction this week wasn’t to bet on Bitcoin.

“I think it’s exactly the same thing that happened to gold,” Louney said. “Inflation scared people and the money went to cash. It didn’t work in bitcoin. It didn’t go into gold ”because people wanted liquidity right now.

It can take a while for the inflation trade to play out.

“I think like gold, bitcoin is not a direct one-to-one inflation hedge,” he said. “Most of the time when there’s inflation, gold is underperforming until we all realize it’s inflation and then it catches up.”

Bitcoin’s underperformance doesn’t surprise Louney. “You know, Bitcoin is an object of risk. It is not just a hedge against inflation. “

Write to Avi Salzman at avi.salzman@barrons.com

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