Can Crypto Hedge Against Inflation?

February 13, 2022 9:03 pm Comments

Cryptocurrency investors and traders these days are keeping a sharp eye on the recent US inflation rate and what the Federal Reserve is going to do.

Currently, it was reported that the inflation rate has now hit 7.5% for the month of January which is the highest it has been in 4 decades.

The release of this data also coincided with government reports that show a strong jobs market with wage growth that seems to be growing at the same rate of inflation.

Many crypto investors see digital assets like Bitcoin to be able to hopefully preserve the value of wealth and operate as a hedge against the continual inflation of the USD with many claiming that the USD is actually a riskier asset to hold as it continually loses value.

More importantly, what the Federal Reserve will do now to counteract inflation is likely going to have market wide impacts on crypto.

CoinDesk reports:

With inflation hitting a new high and the labor market hot, many analysts expect the Federal Reserve to be even more aggressive in raising interest rates than previously forecasted.

The Fed kept interest rates near zero after the latest Federal Open Market Committee (FOMC) meeting in January, but hinted at rate hikes starting in March.

“With inflation well above 2% and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate,” the Fed said in a statement after the meeting.

The cryptocurrency market has seen a sharp drawdown after a period of all-time highs in November, but it has recovered to some extent over the last couple of weeks, which could be a result of the Fed’s hawkishness as inflation has picked up.

“Inflation still has less influence on bitcoin’s price than other speculative factors,” said Scott Bauer, a former Goldman Sachs trader who’s now CEO of Prosper Trading Academy.

“The idea that bitcoin is an inflation hedge has really not been proven yet, it’s still somewhat theoretical.”

Bauer believes that the Fed will continue to do rate hikes, but is not expecting extremely high numbers such as seven or eight rate hikes.

Regardless of what happens, the overall uncertainty in the market is certainly introducing investors to look into alternative assets which leads to new cash flow into crypto.

Most crypto assets, unlike fiat, have fixed limited supplies and some are even deflationary such as Ripple’s XRP due to burning mechanisms where a the supply of a XRP token could actually decrease making it even better than Bitcoin in this regard.

Theoretically, this creates a tendency for the price of the crypto asset to increase long term provided that the demand for the asset stays the same or continues to grow.

Yahoo shares:

Bitcoin (BTC), which some crypto investors believe to be a hedge against inflation because its supply is limited, was down 1.9% in the minutes after the report was released by the Labor Department’s Bureau of Labor Statistics (BLS) on Thursday.

The 10-year U.S. Treasury yield peaked over 2% for the first time since 2019.

The biggest driver for overall inflation continued to be used-car prices, with an increase of 40.5% in January from a year ago and 1.5% higher than in December.

Food prices surged 0.9% month-over-month, adding up to a 7% increase year-over-year, the highest since 1981. Energy costs advanced 0.9% in January.

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