Bitcoin’s value has plummeted this year, undermining the argument often made by crypto enthusiasts that it can be an effective hedge against inflation during turbulent economic times.
Bitcoin advocates have long argued that its scarcity would protect its value in times of rising inflation. Unlike central banks, which can increase the money supply, there is a set number of coins, making them rare.
Even before the market crashed, there was a debate about whether or not Bitcoin would hold its value. Billionaire investor Paul Tudor Jones was bullish on bitcoin as a hedge against inflation, while Dallas Mavericks owner and investor Mark Cuban dismissed the idea as a “marketing slogan.”
Another argument is that bitcoin, as well as other similar cryptocurrencies, will have an intrinsic store of value over time as they become more widely accepted, such as gold. Proponents believe that it will be seen as an asset that will not depreciate over time.
However, this has not been tested, at least not yet. The value of the cryptocurrency market as a whole has fallen alongside rising inflation, with bitcoin losing half its value since January. The bitcoin price was $21,833 on Friday, according to Coin Metrics.
With crypto, “the extension of [price] the volatility is so high that it’s very difficult for me to see it as a long-term store of value,” Anjali Jariwala, certified financial planner and founder of Fit Advisors, told CNBC Make It.
Jariwala says that cryptocurrencies in general are a new type of asset that does not yet function as a coveted commodity like gold, or even as a currency, “because it is not easily exchanged for a good or a service.” Despite its scarcity, the price of a cryptocurrency like bitcoin still depends heavily on consumer sentiment, he says.
“It’s complicated because it’s supposed to act like a currency, it’s taxed like property and some people compare it to a commodity. Ultimately, it’s really its own asset class that doesn’t have a pure definition.”
Another consideration is that cryptocurrencies like bitcoin have only been around for a little over a decade. Because of this, “there’s not enough history in terms of historical data to really understand what it’s for as an investment,” says Jariwala.
While it’s not “proven” that cryptocurrencies like bitcoin are a reliable long-term store of value, they could still gain acceptance over time and become less volatile, says Omid Malekan, an adjunct professor at Columbia Business School who specializes in in crypto and blockchain technology. CNBC Do it.
“Once volatility smoothes out, we will have a better idea of how it reacts to macroeconomic developments, like the rate of inflation or what the Fed is doing,” he says, warning that current crypto prices could reflect all sorts of things. inputs apart from inflation. , such as too many over-leveraged cryptocurrency lenders or lack of regulation.
Either way, crypto as a whole is still a highly speculative investment. Jariwala recommends only investing with money that he is willing to lose. He also says that he views cryptocurrency investing as a long-term strategy and “stick to that strategy even at times like this.”
Cryptocurrency could become a more mature asset that can be a hedge against inflation. But “we don’t know yet, until we see more track history with him,” says Jariwala.
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