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Not an Inflation Hedge? Bitcoin Fizzles After Spectacular Rally

Crypto Amendment
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EDITOR NOTE: As inflation surges toward the sky, bitcoin spirals toward the ground. So much for bitcoin as an inflation hedge. In 2018, when the markets were shaky, many younger investors flocked to bitcoin instead of gold--so much so that bitcoin was hailed as a safe haven--as gold’s digital replacement. Sentiment might have fulfilled that speculative declaration. But fundamentals often deliver a heavy reckoning to speculative fervor, and not the other way around, however long sentiment can sustain itself (remember: longer than you can remain solvent, so it’s said). But the main issue behind bitcoin’s failure as an inflation hedge isn’t all that complicated. Simply put, bitcoin isn’t money. And inflation is a monetary matter.

Original cryptocurrency has lost about half of its value since mid-April

Bitcoin’s steep selloff is undercutting the argument made by the digital currency’s proponents that it’s an inflation hedge.

The original cryptocurrency has lost about half of its value since mid-April, fizzling after a spectacular rally that saw it surge above $60,000 from around $7,000 at the start of 2020. It traded Wednesday afternoon at $31,864, and got a small boost after Tesla Inc. boss Elon Musk said he has personal holdings of the cryptocurrency, as does his space company SpaceX.

The timing is ironic.

Bitcoin’s supporters for years have touted it as an inflation hedge like gold, mainly because the bitcoin network has a set limit on the number of units that can be created: 21 million. Their argument hadn’t previously been tested, however, because inflation has largely been under the Federal Reserve’s 2% target since bitcoin’s 2009 launch.

Now for the first time in years, shortages of semiconductors, lumber and workers are putting pressure on consumer prices, sparking worries about inflation. At the same time, governments and central banks have been forced to spend trillions to prop up their economies, potentially sapping the purchasing power of their currencies.

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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