Thursday, November 11, 2021

An asset as volatile as Bitcoin isn't a good hedge against anything, but it's a good narrative

I see often the idea that crypto is a good hedge against inflation - any asset that can lose over 50% of its value a matter of weeks is not a good hedge against anything. While Bitcoin has a clear upward trend that is likely to continue as it usurps physical commodities like gold and silver, and is less volatile over time, it can still lose a massive amount of value against the dollar in a short amount of time. The value dropped 55% from its high in April to its low in June, and that wasn't even from a blow-off top event like the bull cycle will likely end in. The previous bull cycle blow-off top resulted in a 70% reduction in price in two months.

The idea that Bitcoin, or anything that can predictably lose over two-thirds of its value in a matter of months, is a good hedge against inflation reads like hopium masquerading as a simple responsible financial decision. However, when the bottom falls out at the end of the bull cycle, there will be a lot of people who lose far more money to bad crypto trading than to price increases on goods. While they could hold until the next bull cycle and still come out ahead, you're looking at several years.

People should take anything that makes an asset as volatile as bitcoin sound responsible extremely critically. Even on a long timescale, the idea that bitcoin is a "hedge against inflation" is only reasonable under assumptions that don't fit many people, like stable employment, having money to set aside, and otherwise healthy financials. It also assumes crypto regulations, which I think will come in heavy after this bull cycle completes and people become upset, won't have an effect on the trends of the last several years. It is possible people convinced of the narrative as the bull cycle continues will lose 50% of an investment they made out of fear of their dollars being worth 2-5% less a year.

It is, however, a spicy narrative when inflation fears are running rampant.


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