It is not uncommon for Bitcoin to be portrayed to us as an excellent hedge against inflation, thanks to its limited supply and decentralization. After all, Bitcoin is the solution to the “money problem”. In other words, the scarcity and security of its network make Bitcoin an “effective hedge against inflation.” Of course that is what the propaganda tells us. What does the evidence tell us? The evidence tells us that belief is false.. Bitcoin is not a good hedge against inflation. At least, it isn’t right now. The growth of inflation has, in fact, hurt the price of Bitcoin. Why?
What is an inflation hedge? It is basically an asset that increases in price in times of high inflation. It is purchased as a protective measure. The strategy is to go up side by side with inflation so as not to lose money with the depreciation of the currency.. Here empirical data must prevail over dogmas and aspirations. If inflation in the United States is 8% or more, our assets must rise 8% or more. As simple as that. Real estate, gold, oil, and food tend to be considered good hedges, because their prices are the first to rise when inflation hits. As soon as the prices of these items do not rise at the same rate as inflation, well, at that time, they will no longer be good hedges against inflation.
As much as the mother thinks that her son is the best footballer in the world, the aspiration of a loving mother does not win tournaments. The player is known on the court. The boy can be an excellent person. And he can be extremely talented in other areas. However, he is not Messi. Tesla, for example, is not a good hedge against inflation. The same can be said of Amazon, Apple and Netflix. Bitcoin is an excellent asset. He has shown his potential on many occasions. However, it does not perform very well in environments of high inflation and low liquidity (monetary policy). It’s not the end of the world. But, definitely, it is a reality.
Inflation is not “always and everywhere a monetary phenomenon”. Milton Friedman exaggerated. He was wrong. It turns out that the matter is not so simple. Our knowledge on the subject has grown quite a bit since the publication of his famous book, A Monetary History of the United States (1960). It is time for his followers to update. Inflation is a multifactorial phenomenon. It is not just a matter of money. Supply matters. Expectations matter. Production matters. The velocity of money matters. However, politicians turned Friedman’s sixties ideas into eternal dogmas frozen in time. A dogma is an idea that is not updated by the evidence. The dogmatic does not listen to reasons. He only accepts what confirms his preconceived notions. He becomes blind thanks to his faith. The investor cannot be blind. It must be objective. Your first duty is to take care of your pocket. Therefore, he needs a bias-free mind.. Does Bitcoin grow in times of inflation?
Politicians choose economists who validate their beliefs. They select what they like. And they discard what they don’t like. Then, those ideas, over time, become part of the propaganda repertoire of a given group. The right has its economists. The left has its own. Do you contradict Milton Friedman? Ah, surely you are a leftist lover of the oppressive state. You are a “Keynesian”. A progress. That attitude is definitely a problem for those who want to study a phenomenon objectively. What happens when the evidence contradicts the dogma? Automatically, you become the traitor of the group. That’s the way it is, folks. Free thought is an offense nowadays. The group forces you to repeat their propaganda. All divergent thinking is labeled as heresy. The truth of the tribe is the truth of the universe. Everyone must sing the same song. The investor, however, must place himself well above these diatribes.
The price is a three-pillar table. We have the money in circulation. We have the production of goods and services. And we have the consumer. Each of these pillars is made up of a set of several elements. Objective and subjective factors. Price stability is necessary in order to have an efficient economic apparatus.. Money is an abstraction like the measures of distance, weight and time. Stability is predictability. In many ways, money is a form of organization. Not too much, not too little, just exactly. Stability in money is efficiency. Deflation is as harmful as inflation.
During the financial crisis of 2008-2009, a deflationary crisis was generated that was solved with liquidity injections. During the coronavirus crisis, a similar prescription was applied. Indeed, the recipe worked very well at first. But it proved to be too much in its later stage. The rain of money is necessary in times of drought. However, unlike the last crisis, during this crisis, the rain that fell from the sky met with clogged drains. Globalization is essentially deflationary. This implies that a failure of the production and distribution chains at a global level generates a supply shock. In other words, they plug the drains. And that causes a flood. In other words, economic overheating.
Bitcoin, in the past, has functioned as a sponge that absorbs excess liquidity from the system. Cheap money increases investors’ appetite for risk. The money is then used to buy assets with future potential. The market becomes more speculative. However, in times of high inflation, the monetary authorities are forced to withdraw liquidity in search of stability. This makes the markets more conservative. Inflation has hurt the Bitcoin price, as investors are looking for more stable assets to hedge against a potential recession. Word more, words less, the sponge does not have the liquidity to grow.
Politicians, in general, present us with a binary world. Free market or statism. The good ones or the bad ones. There are no half measures. It is one or the other. It’s the statism team. Or is the team free market. There are no more options. The investor, however, must see beyond the false dilemmas of politicians. Our pocket requires a lucid mind free of bias. More than dogmatic we must be empirical. What does the evidence tell us?
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information set forth herein should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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