Summary of the treatise
Inflation has hit the stock market and many investors have sought to evacuate to inflation hedging.Bitcoin (BTC-USD) has been advertised by many as an inflation hedge given its rarity, but its performance is It seems to have a closer relationship with stocks than with commodities like gold.
Bitcoin is a necessity for a variety of reasons, but it doesn’t currently act as an inflation hedge, especially if the dollar is strong.
In addition, I propose that there is a better hedge against inflation in the area of cryptocurrencies, it is Ethereum (ETH-USD).
Bitcoin Inflation Hedging Discussion
Bitcoin is made to imitate gold in many ways. Supply is increased by “mining”. This is a slow process that gets harder over time. Like gold, Bitcoin’s supply is finite, but perhaps you may still find more holds, but 21 million Bitcoin is all that has ever existed.
With that in mind, people often believe that Bitcoin needs to act as an inflation hedge, as gold is perceived as an inflation hedge. However, Bitcoin is trading much more in sync with the Nasdaq 100 (NDX) And “risk-on” assets.
We find that BTC and NDX performance are closely related, especially after the 2020 covid crash. Bitcoin performed best under covid-induced deflation.
what happened? Is Bitcoin like gold or stock?
Before answering this, we need to look at another important variable. Dollar index (DXY).
In the chart above you can see the performance of gold, dollars and bitcoins. You can see some correlations, but you can also see how long this is broken.
Strongest (reverse) Correlation is what you see between BTC and the dollar. Bitcoin peaked just as the dollar bottomed out and is on a downtrend as the DXY rises above 90-108.
Gold, on the other hand, has rebounded strongly in Bitcoin after the Covid crash, but has been trading sideways since then. definitely. At the same time as the dollar was rising, it was okay in 2021. However, gold has fallen since March as the dollar’s upward trend is accelerating.
Many people seem to ignore here that we are witnessing both rising prices and a very strong dollar, but that doesn’t make much sense on the surface. Higher inflation is the result of excess cash vs. commodities in the economy, a sign of “currency weakening.”
However, inflation and a stronger dollar can be seen. why? There are several reasons. First, the dollar is considered heaven. Second, the Federal Reserve is raising interest rates faster than in other countries, with lower inflation than in Europe, for example. Third, this can be seen as evidence that today’s inflation is caused by a shortage of supply shocks rather than straight financial inflation. Or at least a combination of both.
Therefore, Bitcoin is both a “rare resource” and a currency, and like almost all other currencies, it is falling against the dollar. In a scenario where currency depreciation triggers inflation, Bitcoin could be a hedge against inflation, but today it is not.
Ethereum could be a better and more valuable store
With the above in mind, I would like to point out that in the area of cryptocurrencies, there are excellent alternatives to Bitcoin in terms of inflation hedging. That is Ethereum.
As you may know, Ethereum is the second largest cryptocurrency in the world and is now Proof of Work (POW) Consensus mechanism. However, this has changed following “Merge”, turning Ethereum into Proof of Stake (PoS)coin.
In PoS, coins are no longer mined, but are acquired / created by staking, including locking existing Ethereum. We will mention this as this change will make ETH more deflationary. This is because PoS rewards are part of PoW rewards. According to Tim Beiko, who is responsible for coordinating the work of Ethereum’s core developers, it’s about one-fifth to one-tenth.
As Ethereum moves to PoS, less ETH will be created per block. Moreover, Ethereum recently introduced a combustion mechanism under the EIP-1559, which is part of the London Hard Fork. Following this update, the block size has increased and some of the rewards sent to miners have been burned.
Ultimately, this means that ETH should be a deflationary currency. Ethereum should shrink at a rate of 2% each year after the merger, according to estimates from ultrasonic money.
So if you’re looking for a rare asset to protect yourself from inflation, you don’t have to look for anything more than Ethereum. Not only that, ETH has specific utilities within its blockchain. ETH is required to pay for gas to execute smart contracts.
If Bitcoin is digital gold, you can see that Ethereum is a digital oil and the latter shows much better performance during this period of inflation.
Cryptocurrencies do not act as an inflation hedge against the strong dollar. The scenario in which they become inflation hedges is when the dollar is at a disadvantage, and I believe something will happen, but at this point it is not. It’s not saying that Bitcoin and Ethereum are moving forward and not working well, it’s just saying that inflation isn’t the reason. Of the two, Ethereum definitely has more usefulness, and its supply declines each year, perhaps making it an even better and valuable store.