#9: Why bitcoin isn’t my inflation hedge
December 20, 2021
Inflation hit 6.8% last week. Super cool. While major companies try to justify any raise less than that, millions of people are looking at their crypto portfolio wondering why bitcoin has absolutely tanked in the last month. As of today, Bitcoin is trading around $46,700, off its November high of almost $69,000. One reason people have put their money into crypto is the idea that it’s particularly resistant to inflation. So what gives? Where’s my hedge?
Well it’s true that Bitcoin has gained significant value while the dollar has lost value. Bitcoin went from virtually worthless in 2010 to more than $20,000 in 2020 to $60,000 just a few weeks ago. Meanwhile, the dollar, by design, loses purchasing power over time. 2% per year if the Fed hits its goal. 6.8% per year if you live in a time when politicians cross breed a fire hose with a money printer.
One reason for the belief in Bitcoin has a hedge is the limited supply. The supply of USD has increased 37% since 2020 while the supply of Bitcoin has increased 4%. By design, there will only every be 21 million Bitcoin in existence, and every four years the amount of bitcoin that can be mined is reduced by half (known as halving, duh). To date, approximately 19 million Bitcoin (90% of the total) have already been mined. This scheduled tapering of new supply over time makes Bitcoin predictable in unique ways — unlike gold, no new bitcoin can ever be “discovered.”
So what’s happening now? All the above is true. Now is Bitcoin’s time. When comparing two assets, it’s easier to believe the price of the supply-constrained one will go up more than the one that’s constantly oversupplied all else being equal. All else being equal. That’s the part you won’t get from from Coinbase or Bitcoin maximalists.
Bitcoin as a hedge, asset, or any store of value only works if a critical mass of people decide it does. Why has gold historically been an inflation hedge? Because people decided it would. Common knowledge - everybody knows that everybody knows that gold is an inflation hedge. When you lose trust in the dollar, you put your money in gold. That may be the case with Bitcoin one day, but whether or not that day is today is still speculative. Now may still be a time to buy Bitcoin, but maybe not as an inflation hedge.
If you get updates from Coinbase and read their latest “Bytes” email, the hearty answer to the question of “why isn’t this acting like a proper hedge” is: “what? well look over here. other good stuff is happening!” Because, in the end, it only works as a hedge if everybody decides it does and common knowledge takes hold.
