Gold, Bitcoin or DeFi: where is the inflation protection?

In the past 10 years, Bitcoin has seen 20 different bear markets. Is it time to prove yourself?

Bitcoin was created after the 2008 financial crisis and was intended to solve the problems caused by loose monetary policy. The shooter who ushered in the crypto era for the first time, Satoshi Nakamoto, said in late 2008 that the supply of cryptocurrencies had “increased by the expected amount” without “necessarily leading to inflation”.

Bitcoin’s rate of inflation has been set and its circulating supply is capped at 21 million coins, which is expected to stop mining in 2140. Bitcoin’s inflation rate will then drop to 0. In contrast, fiat currencies do not have a limited supply and can be printed to adjust monetary policy.

An expansionary monetary policy, as it has been practiced by most countries around the world in recent years, aims to expand the money supply through interest rate cuts and the central banks towards quantitative easing.

This expansionary monetary policy has long been believed to lead to higher inflation, defined as the devaluation of the means of payment with rising costs for goods and services. In November, inflation in the United States soared to a 30-year high, while inflation in the eurozone hit a 25-year high.

Chris Kline, chief operations officer and co-founder of the crypto retirement platform Bitcoin IRA, says inflation is not temporary and is forcing people to “find an alternative to protect their wealth.”

Kline notes that while gold and real estate have been strong choices in the past, real estate prices are currently reaching exorbitant highs while gold is “inaccessible to the average American.” Bitcoin is currently part of an “inflation hedge mix” as its supply cannot be manipulated in the same way as the supply of fiat currency.

Martha Reyes, head of research at Exchange Bequant, points out that the market is reacting quickly to the latest inflation figures by pricing in possible interest rate hikes by central banks. For Reyes, “the main cause of these high inflation rates is the massive increase in the money supply as trillions of dollars of new money have been printed as a result of the pandemic”.

Historically, gold was used as a protection against inflation. Bitcoin and other cryptocurrencies are often referred to as “Gold 2.0” because they have properties that make them digital versions of precious metals.

Cryptocurrencies as protection against inflation

Cryptocurrencies are notoriously volatile, as even with blue-chip crypto investments a drop of up to 50% can occur in a short time. This type of volatility has led many to wonder whether Bitcoin and other cryptocurrencies could be a viable inflation hedge.

In a customer announcement, JPMorgan strategists suggested that a portfolio allocation of 1% in Bitcoin could serve as a hedge against asset movements. The billionaire investor Carl Icahn has also advocated Bitcoin as an inflation protection.

Adrian Kolody, founder of the decentralized decentralized exchange Domination Finance, reiterated Kline’s view that Bitcoin is a solution to inflation, but noted that there are other ways in the crypto space to do it.

Kolody pointed to the DeFi sector as a possible alternative. He suggested that by using stablecoins – a cryptocurrency with a price control mechanism – and decentralized applications (dApps), investors could “beat inflation” while protecting themselves against the “risks” of spot positions. To do this, they have to find a way to generate returns on stablecoins that are higher than the annual inflation rate.

“The best thing about cryptocurrency is that you have the flexibility to control your finances in many ways instead of depending on the federal government.”

Reyes noted that Bitcoin is “a more attractive store of value than other assets such as commodities,” as growing demand can only be met by rising prices rather than additional production.

Reyes added that the cryptocurrency is in an “adoption phase” which means that it “typically does not have a consistent correlation with other assets and an increase in price should result from cycles.” Halving and network growth.

Earlier this month, Bitcoin appeared to have demonstrated its potential as an inflation hedge when it hit an all-time high (ATH) in Turkey as the country’s fiat currency, the lira, fell free. Others argue that the people of Turkey would be better off investing in gold.

Benefit and Freedom or an Inheritance?

Bitcoin has far outperformed gold so far in 2021 as it has risen 94% since the beginning of January. Meanwhile, gold is down more than 8% over the same period, meaning investors betting on the precious metal have not yet been able to hedge against inflation.

During his brief stay in Turkey, gold did exactly what it had to do: it protected people’s purchasing power by preserving its value during the lira’s decline. In the past 30 days, it has even outperformed Bitcoin in Lira.

When zooming out, Bitcoin is clearly a much better bet, up 270% over Fiat, while gold is only up 70% so far. The data shows that investors should only bet on gold when the crisis escalates, but in the long run, Bitcoin will be the better option.

When asked whether investors should choose Bitcoin or Gold for inflation protection, Kolody argued that the “Bitcoin and Crypto Standard” is a better alternative to fiat currencies or the gold standard.

This, says Kolody, enables crypto and DeFi structures to be as robust as they are, as investors “don’t have to worry about a political puppet” that has the ability to “mislead”. “While people see gold as an adequate protection against inflation, Bitcoin is the” obvious choice “for them.

Karan Sood, CEO and Managing Director at Cboe Vest, an asset management partner of Cboe Global Markets, said it was noteworthy that Bitcoin’s relatively young history has “goods and bads” because there was a time when both Bitcoin and inflation rose and fell in parallel.

Sood added that Bitcoin’s inherent volatility is likely to exacerbate these moves. For example, if the current level of inflation is temporary and plummeting from its highs, Bitcoin could “plummet as well, potentially causing significant losses for investors.”

As a solution, Sood suggested that investors looking to use Bitcoin to hedge against inflation “could benefit from exposure to Bitcoin through a strategy that aims to manage the volatility of Bitcoin.” Bitcoin itself.

Yuriy Kovalev, CEO and founder of the crypto trading platform Zenfuse, says that while the free fall lira can mean betting on gold is a good move, it is not for investors in the US.

“Gold has underperformed this year, down 8.6% against the dollar, while the US CPI is up 6.2%. Investors betting on gold have failed while Bitcoin is up 92.3% so far, rewarding those who believe in it as a hedge. ”

Reyes acknowledged that while Bitcoin offers better returns as measured by the Sharpe ratio (a tool that allows investors to study the total risk-adjusted return on a portfolio or asset), investors might “want gold in their portfolio even for diversification purposes “. although it didn’t do well this year “.

For more conservative investors at least, a diversified portfolio can be a more affordable inflation hedge, as it remains unclear how the Bitcoin price will perform if inflation continues to rise.

Ass as a joke

All in all, it remains unclear whether Bitcoin and cryptocurrencies are a better solution for the current financial system. For Stephen Stoneberg, CEO of the Bittrex exchange, “we should strive for a balanced combination of both systems.”

“Both models have advantages, but Bitcoin and the entire digital asset economy must be more deeply integrated into the traditional financial system in order to reach the unbanks in the world.”

Caleb Silver, editor-in-chief of finance portal Investopedia, says claims that Bitcoin acts as a hedge against inflation are still fairly vague.

According to him, Bitcoin is a relatively emerging asset when compared to traditional inflation hedges like gold or the Japanese yen, and although its properties are “an important part of its perception as an inflation hedge,” price volatility affects reliability.

“Bitcoin has been involved in 20 different bear markets over the past decade and has seen a decline of 20% or more in nearly 80% of its history. Consumer prices were clearly flat until the pandemic over the past decade.

Silver added that Bitcoin was a “highly speculative asset” even though institutional investors have been using it for more than two years.

He concluded that Bitcoin’s failure to be viewed as a store of value by most market participants “damaged its credibility as an inflation hedge.”

To hedge against inflation …