Is Bitcoin a hedge against inflation?

Why not Bitcoin?

With the risk of offending my readers, Bitcoin has no history of being a hedge against inflation. Nor has any other cryptocurrency been proven to protect wealth in times of inflation. But why? First of if Bitcoin is a store of value, what is its utility?

Not a very useful currency.

The volatility in Bitcoin and other Crypto’s makes them terrible means of exchange. You can’t set your prices in crypto currency only in dollars. Because the dollar may lose value or get stronger against other currencies, the changes are not so extreme from month to month or day to day, even with inflation over 8%. For instance, when Tesla was allowing buyers to purchase a Tesla with Bitcoin, it was at the set price in dollars and, depending on the value of Bitcoin that day. The refund process if something went wrong or if the Tesla got reposed was very telling.

Not a good store of value.

Again, because of the volatility, Bitcoin is not a good store of value. It is worth today whatever the next person is willing to pay for it. Theoretically, it could go to zero. Also, governments could shut it down when they see it competing against their currency or if you are seen as being from a hostile country like Russia. You can’t eat Bitcoin, you can’t make jewelry out of it, it can’t be used as a conductor of electricity. It is simply Fugazi.

Blockchain Technology and the finiteness of Bitcoin.

While Blockchain technology is an innovation. A public record on the blockchain is impressive, but no one can force the value to be set as anything. It will go up if they hype it, but if no new buyers come into the marketplace, the price drops.

Bitcoin is a “risk on” asset.

People are not buying Bitcoin to protect their wealth they buy it as a speculative asset hoping to get rich. Unfortunately, there are no breaks on the Bitcoin train. Nine months since El Salvador bought into Bitcoin, the country faces a crisis as half of its value has disappeared. El Salvador now needs to come up with a lot of cash, more than 1 billion dollars to cover its debt payment for Bitcoin.

“Not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air.” -Donald Trump

A Zero Sum Game.

Bitcoin is a zero-sum game, meaning that anyone who makes money in Bitcoin another person must lose money. For every Crypto winner, there are crypto losers. Look at the difference between common stocks that issue dividends. With a dividend stock, the share price may go down, but you could still make a quarterly dividend while holding it while the price goes down. In contrast, you could have made a lot of money if you sold Bitcoin at the peak price of around $60,000 but lost a lot if you bought then hoping it goes higher.

Fiat Currencies Vs Bitcoin.

Bitcoin has drawn a lot of attention to what Fiat Currency is. But there is still a lot of power in Fiat Currency. The government has men with guns that coerce people to do what the people in power want. Currently, at the writing of this Bitcoin has lost 70% of its value since its peak. But if it had gone higher, Bitcoin owners may have suffered a worse fate. Governments do not like currency competition. They could just restrict it all together, make the transfer of Bitcoins illegal, lock all accounts. We saw this with U.S. going after assets of Russian oligarchs and with Canada going against its own citizens who protested peacefully during the “Trucker Protests.” Unlike physical gold that could be hidden and sold for cash, very secretively Bitcoin can be tracked.

If cryptocurrencies see material growth, governments would likely ramp up their efforts to restrict them. –Ray Dalio. 

The Greater Fool Theory.

Like the Dutch Tulip Mania of1637, Bitcoin relies on the Greater Fool Theory. The Greater Fool Theory is the concept that, during a market bubble, a person can make money by buying an overvalued asset and selling it for profit later because it will be possible to find someone else willing to pay a higher price. The theory breaks down when the biggest fools have already bought and no one else is willing to buy it. 

Bitcoin is coupled to the Nasdaq.

It appears for now that Bitcoin thrives in speculative environments when growth stocks are being chased. Ironically, when deflation seems to be talked about and quantitative easing is being used, people seem more willing to buy Bitcoin with extra cash. But when markets are squeezed, Bitcoin sells off. Many people who are Bitcoin holdlers will disagree with me because it is in their best interest to find a greater fool to buy their Bitcoin. I would recommend holding boring old gold instead of Bitcoin to preserve your wealth and hedge against inflation. 

Central Banks do not hold Bitcoin.

Except for EL Salvador, which is now a warning to the rest of the world. Central banks do not hold Bitcoin as a reserve asset, but they do hold gold. The United States holds 8,133.5 tons of Gold as a reserve asset. But no Bitcoin is held as a reserve asset by any country besides El Salvador. And the Long-Term Foreign Currency Issuer Default Rating (IDR) of El Salvador has gone down from B- to CCC since February 2022.

You can make money buying and selling Bitcoin.

I’m not saying that you can’t make money buying and selling Bitcoin. Some people make money gambling on professional sports. Some people are really good at gambling on sports or in playing poker. But Bitcoin is not a hedge against inflation.