Inflation vs. Bitcoin: How Speculation to Hedge Inflation has Failed in Short Term but may Create Opportunity in Long Term

People said “inflation is a theft”.

What is inflation anyway?

According to “Investopedia”, “inflation is the decline of purchasing power of a given currency overtime”. In the other word, too many things to chase too few goods. However, there are three types of inflation: demand-pull inflation, cost-push inflation and built-in inflation.

Demand-pull inflation: demand > production

Cost-push inflation: cost of production is too expensive

Built-in inflation: prices rise along with wages to maintain living standards Reference link: https://inflationdata.com/Inflation/Inflation_Rate/CurrentInflation.asp

Currently, U.S. inflation is about 5.39% compared to the standard Fed target of 2%. It means you required to increase your salary of 5.39% to meet previous year of living standards.

We all knew what caused inflation: Fed prints too much money. We are at the demand-pull inflation period and likely to move into cost-push inflation as labor shortage increases and built-in inflation that cost living is too high to bearable.

Why do people speculate Bitcoin can hedge inflation?

People are doubting the current system with the Fed printing too much money and the financial system is too vulnerable to uncertainty of the future. Bitcoin is like an insurance policy for the current monetary policy in case it fails. It creates hope in case the worst scenario occurs. Its existence is purely an opportunity that one may hold in case a catastrophic event happens. Although during COVID-19 induced financial crisis, Bitcoin also dropped along with the financial market.

In the current performance, it seems Bitcoin falls short of its price again and it did not perform as what people speculated it would be - to hedge inflation.

According to Barron’s article, Bitcoin has not yet fully tested in a truly inflationary environment. Moreover, Bitcoin swings largely due to speculation of its valuation rather than real assets with intrinsic value. But even gold did not perform as well as many people expected since gold’s correlation to inflation is relatively low at 0.16 over the past half century, according to CNBC reported.

Here is my opinion about inflation hedge:

In my opinion, to be able to hedge inflation, you either 1) need to be more expensive in a short period of time to create opportunity or 2) steadily increase its valuation in an inflationary environment to create a safe haven.

It seems Bitcoin can achieve the first condition.

From earlier 2021, Bitcoin price moved faster to around $64K in mid-April which seems a bit like inflation hedge but then it cut a half in June.

Due to its valuation is still heavily relying on speculation, Bitcoin is as risky as itself to create opportunities for others to hold it for hope it can save from the worst.

However, a large swing of price movement in an inflationary environment can be a chance to hedge but being unsteady at the high price level often makes people doubt its valuation.No to mention its speed and cost of transaction fees during the high price range for users to process payments. It is decentralized of its processing of payment but it is centralized with operations with such processing fees as miners concentrated with few companies. Also, whales of Bitcoin controlled large sums of Bitcoin and they could manipulate markets which they haven't done so with evidences suggested.

As inflation may increase in the coming years, we may observe how Bitcoin performs in the long term rather than the short term period.