Image: Gabriella Turrisi/Axios
Bitcoin as a safe haven against inflation, once accepted wisdom for crypto advocates, is proving questionable.
Why it matters: With consumer price indices persistently high, the world’s largest and oldest digital asset has collapsed, shaking investor confidence that it can act as a safe haven in times of market turmoil.
Game Status: Bitcoin now has sufficient history to offer a dataset that can be analyzed and searched for patterns, giving way to theories about future price movements and the purpose it might serve in investment portfolios.
- But they are just that, theories.
- The pros Axios spoke to — investors, crypto experts and suckers, advisors, researchers, and a professor — offered their best explanations of why bitcoin isn’t proving to be the major inflation hedge that many expected.
What you say: “‘Bitcoin as an inflation hedge’ was a decent story — not that I bought it,” says Michael Batnick, managing partner of registered investment advisor Ritholtz Wealth Management, though he admits he’s not a crypto expert.
- “With rates going to zero, Treasury sending checks and printing money – that there could only ever be 21 million bitcoin was a compelling argument.”
- [But] You need to have your brain examined. [Bitcoin] is a risky investment. Period,” Batnick tells Axios.
flashback: Bitcoin started its ascent in 2020 and peaked at almost $70,000 in November 2021. Until the moon, that seemed like an understatement at the time.
- “But that’s how it was,” counters Batnick. “Everything went like clockwork. But were Gamestop and Home Depot an inflation hedge?”
A small nuance: David Lawant, head of research at Bitwise Investments, says people get this wrong.
- Rather than linking Bitcoin to things like the consumer price index, its relationship in terms of future inflation expectations should be examined.
- “While the CPI is undoubtedly running hot in 2022, long-term inflation expectations have in fact been flat or even falling since late 2021/early 2022,” says Lawant, listing expected 10-year and 5-year inflation expectations.
Hedge or risk investment? Yes. Bitcoin has many facets, according to Noelle Acheson, author of the Crypto is Macro Now newsletter and former head of market insights at Genesis. It behaves sometimes like a risk asset — and sometimes like a hedge.
- “In the short term, bitcoin will likely behave more like a risk asset than an inflation hedge,” she said.
Difficult to judge. Markets don’t make sense right now, says Greg King, CEO of Osprey Funds.
- “After the 2008 crisis [the] The Fed has cut interest rates to zero for a long time. Many longtime managers threw up their hands. We’re in a similar situation now,” he says
- “When I see CPI pressure getting higher and bitcoin selling off, it doesn’t make sense to me. The only way to rationalize this is for the market to take this as an indication of further tightening, otherwise it makes no sense.”
Everything is relative. “Bitcoin can be better portrayed as a currency depreciation hedge, and over the long term, it has held up to that standard,” said Anthony Rousseau, Senior Director of Product Strategy at TradeStation Crypto.
- “Bitcoin has held up quite well over the past few weeks while stock markets have made new lows. Right now, investors are having a hard time justifying safe havens while this global liquidity crunch is taking place,” he says.
- Bitwise’s Lawant also suggests examining the case of “Bitcoin as a hedge” by assessing its performance against other well-known portfolio deadweights such as gold.
There is nothing to see here. There is no connection, says Thomas Conlon, associate professor of banking and finance at the University of Dublin College School of Business.
- In a paper published in September 2021 titled “Inflation and cryptocurrencies revisited: A time-scale analysis,” Conlon noted that there was no connection between Bitcoin and future inflation expectations, except for a moment during the peak of the pandemic.
- “Our findings were that there was a correlation between Bitcoin returns and changes in inflation only during the very brief period in 2020, when inflation expectations fell rapidly,” Conlon tells Axios.
context: Bitwise and Professor Conlon agree on this – there was the emergence of a link between inflation expectations and the recently observed Bitcoin price. Among other things, they do not agree on whether this link makes sense.
The final result: What the pros mostly agree on is the short-term price expectations for Bitcoin. In summary: More pain is likely.
- “Recent changes in inflation expectations appear to be associated with a decline in the price of bitcoin,” says Conlon. “It makes economic sense as rising interest rate expectations make bitcoin less attractive in an interest rate environment [rates] are no longer around zero.”
- “As bitcoin has held in this $18,000-$20,000 range due in part to the cost base of long-term holders, lower price levels could be seen if some of those holders capitulate for exogenous reasons due to the macro environment,” Rousseau says.
(Editor’s note: This article has been corrected to reflect that Greg King is CEO of Osprey Funds, not Osprey ETFs.)