The “Bitcoin as safe haven” theory is crumbling in the face of persistent inflation

Bitcoin as a safe haven against inflation, once the accepted wisdom of crypto devotees, is proving questionable.

Why it’s important: Faced with persistently high CPI prints, the world’s largest and oldest digital asset has crumpled, undermining investor confidence that it can act as a safe haven in times of market turmoil.

Status: Bitcoin has a sufficient history now to provide a data set that can be analyzed and mined for patterns, giving way to theories about future price movements and the purpose it can serve in investment portfolios.

• But they are just that, theories.
• The pros Axios spoke to — investors, crypto experts and rubes, advisors, researchers and a professor — offered their best explanations for why bitcoin isn’t turning out to be the great inflation hedge many expected it to be.

What they say: “‘Bitcoin as an inflation hedge’ was a decent story — not that I bought it,” says Michael Batnick, managing partner at registered investment adviser Ritholtz Wealth Management, though he admits he’s no crypto expert.

• “With prices at zero, the Treasury was sending checks and printing money – that there could only ever be 21 million bitcoins was a compelling argument.”
• [But] you need to check your brain. [Bitcoin] is a risk asset. Period, Batnick tells Axios.

Flashback: Bitcoin started its ascent in 2020 to reach a peak near $70,000 in November 2021. For the moon at the time seemed like an understatement.

• “But that was everything too,” counters Batnick. “Everything went wrong. But were Gamestop and Home Depot an inflation hedge?”

A small nuance: David Lawant, director of research at Bitwise Investments, says people are looking at this the wrong way.

• Instead of tying bitcoin to things like the consumer price index, the relationship should be examined in relation to inflation expectations.
• “While CPI will undoubtedly run hot in 2022, long-term inflation expectations have actually been flat, or even down, since late 2021/early 2022,” Lawant says, citing 10-year forward and 5-year inflation expectations.

Hedging or risk assets? Yes. Bitcoin has many facets, according to Noelle Acheson, author of the Crypto is Macro Now newsletter and former Genesis head of market insights. It sometimes behaves as a risk asset – and as a hedge for others.

• “In the short term, Bitcoin will likely continue to behave more like a risk asset than an inflation hedge,” she said.

Difficult to judge. The markets don’t make sense right now, says Greg King, CEO of Osprey ETFs.

• “After the crisis in 2008, [the] The Fed took interest rates to zero for a long time. Many long-time leaders raised their hands. We are in a similar situation now, he says
• “When I see CPI pressure going higher and bitcoin selling, it doesn’t make sense to me. The only way to rationalize it is that the market sees it as an indication of further tightening, otherwise it doesn’t make sense.”

It’s all relative. “Bitcoin can be better represented as a currency depreciation hedge, and from a long-term perspective it has lived up to that standard,” said Anthony Rousseau, TradeStation Crypto’s senior director of product strategy.

• “Over the past few weeks, Bitcoin has held up pretty well while stock markets have made new lows. At this point, investors are having a hard time justifying some safe places to hide while this global liquidity squeeze takes place,” he says.

• Bitwise’s Lawant also suggests examining the case for “Bitcoin as a hedge” by evaluating its performance against other known portfolio ballasts, such as gold.

Nothing to see here. There is no link, says Thomas Conlon, Associate Professor of Banking and Finance at the University of Dublin College School of Business.

• In a paper published in September 2021, titled Inflation and cryptocurrencies revisited: A time-scale analysis, Conlon found that there was no correlation between bitcoin and forward inflation expectations, with the exception of a moment during the peak pandemic.
• “Our findings were that there was a correlation between bitcoin returns and changes in inflation only during the very short period in 2020 when inflation expectations fell rapidly,” Conlon tells Axios.

Context: There is something that both Bitwise and Professor Conlon agree on – it was the emergence of a link between inflation expectations going forward and the price of bitcoin observed recently. Whether that link is meaningful is where they disagree, among other things.

The bottom line: What the pros mostly agree on are short-term price expectations for bitcoin. In summary: More pain is likely.

• “Recent changes in inflation expectations appear to be associated with declines in the price of bitcoin,” says Conlon. “Economically, this makes sense, as rising interest rate expectations make bitcoin less attractive in an environment of interest [rates] is no longer around zero.”
• “Since Bitcoin has held up in this $18,000 to $20,000 range in part due to the long-term holders’ cost basis, lower price levels could be seen if some of these holders capitulate for exogenous reasons due to the macro environment,” says Rousseau.