Bitcoin was supposed to hedge against inflation-here’s why it hasn’t worked that way

Bitcoin has fallen in value this past year, weakening the argument that it can be an effective hedge against inflation during economic turmoil.

Bitcoin supporters have long believed that Bitcoin’s scarcity would preserve its value in times of rising inflation . There are a limited number of coins. This is in contrast to central banks, which can increase the money supply.

There was much debate over bitcoin’s value before the crash. Paul Tudor Jones, a billionaire investor, was positive on bitcoin as an inflation hedge. Mark Cuban, owner of the Dallas Mavericks and investor in the project dismissed it as a’marketing slogan.

Another argument is that bitcoin and other similar cryptocurrencies will retain their intrinsic value as they become more widely accepted. It will be considered an asset that doesn’t lose value over time, according to supporters.

This hasn’t been proved to be true. With rising inflation, the cryptocurrency market has seen its value plummet along with bitcoin’s half-life since January. According to Coin Metrics, the bitcoin price is $21,833 as of Friday.

Crypto is characterized by a high degree of volatility, making it difficult for me to see it as a long-term value store. Anjali Jariwala (certified financial planner, founder of Fit Advisors) tells CNBC Make It.

Jariwala states that crypto is a new asset, and that it doesn’t function as a commodity like gold or as a currency. This is because it can’t be exchanged for goods or services. She says that despite its scarcity, bitcoin’s price is still determined largely by consumer sentiment.

It’s complicated because it is supposed to behave like a currency. It’s also taxed as property. Some people even compare it to a commodity. It is an asset class which doesn’t have a clear definition, but it does exist.

Consider also that bitcoin and other cryptocurrencies have only been around for a little over ten years. Jariwala explains that there is not enough historical data available to understand the purpose of bitcoin as an investment.

Although cryptocurrencies such as bitcoin have not been proven to be reliable and long-term value stores, Omid Malekan, an adjunct professor from Columbia Business School, says that they could still gain acceptance over the course of time and become less volatile.

He says that once volatility has subsided, it will be easier to see how the Fed responds to macro developments like the rate and direction of inflation. However, he cautions that the current prices of crypto could reflect other inputs than inflation. For example, too many high-risk cryptocurrency lenders, or a lack of regulation .

Crypto as a whole is still a highly speculative investment. Jariwala advises not to invest with money that you aren’t willing to lose. Jariwala also recommends that you view crypto investing as a long-term strategy, and to’stick with that strategy even in times like these.

The cryptocurrency could become a mature asset that can act as a hedge against inflation. Jariwala says that ‘we don’t know’ yet because we haven’t seen more track records.

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