Bitcoin shows possibilities for inflation protection
Bitcoin has long been referred to as “digital gold” — a code that suggests the digital currency has inflation-fighting capabilities on par with the yellow metal.
As such, both assets were disappointing in 2022, but with the consumer price index (CPI) still at uncomfortably high levels, investors are looking for anti-inflation assets, especially those with significant upside potential. Bitcoin checks that box.
More recently, bitcoin’s 2023 resurgence has been driven by factors beyond inflation, including bank runs.
“The run on Silicon Valley Bank underscored the remarkable qualities of digital finance, with venture capitalists effectively topple a bank using smartphones and group chats in just a few hours. In periods of political unrest such as wars, pandemics or changes in government, the importance of digital portability cannot be overstated. After all, it is unlikely that anyone will transport gold or paper bonds across national borders,” noted angel investor Tatiana Koffman in a post on CoinDesk.
Koffman, the publisher of the weekly newsletter, MythOfMoney.com, presents a historical example of why bitcoin may remain a useful inflation-fighting asset class in the near to medium term. Simply put, the Federal Reserve was able to stop historically high inflation in the early 1980s, but it took drastic increases in interest rates.
In mid-1981, the Fed funds rate was nearly 20% – a level unthinkable today. That is, inflation may be reversed, but there may be bumps along the way, and the turbulence may highlight the allure of bitcoin for some investors.
“Many analysts and economists now believe that to effectively curb inflation, the federal funds rate must exceed the rate of inflation for an extended period. Currently, inflation is hovering around 6% (as of February 2023), while the range for the federal funds rate is between 4, 75% and 5%.Consequently, further rate hikes are likely on the horizon, Koffman added.
She also noted that famed investor Paul Tudor Jones measures the effectiveness of inflation-fighting assets using four metrics: purchasing power, liquidity, portability and reliability. These are all the boxes checked with gold. Specifically for bitcoin, a case can be made that the largest cryptocurrency answers the purchasing power call, and its portability is undeniable.
For now, bitcoin liquidity is solid, although it may be affected by more market participants holding their holdings for longer time frames in hopes of returning to late 2021 record highs around $69,000. In terms of reliability, bitcoin lacks gold’s 2,500-year history, but remaining solid when inflation is high can go a long way toward building investor confidence.
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The opinions and forecasts expressed herein are solely those of Tom Lydon and may not materialize. Information on this website should not be used or construed as an offer to sell, a solicitation of an offer to buy or a recommendation for any product.
