Gold 2.0 some call it – 2021 was a wild year for the cryptocurrency as it transformed into an asset on par with gold with many valuing it as a hedge against inflation and some still arguing that it would replace the dollar.
With the Federal Reserve planning on fighting inflation this year, why are we seeing Bitcoin’s price tank? Inflation hit its highest level in 40 years at 7% in December. If it were valued to hedge against inflation, Bitcoin should not be tanking. In addition, the Dow is down over 5% this year and tensions with Russia over their conflict with Ukraine are creating significant uncertainty.
Bitcoin dropped to $35,000 USD on Jan 22 and has been hovering around $38,000 USD over the past week. Nearly down 50% from its all time high of $68,000 in November 2021.
In a recent interview with Barrons, Clara Medalie – research director at Kaiko suggests “Cryptocurrencies are no longer an isolated risk asset and are responding to changes in global policy, it’s not surprising that both will start to become more volatile as the liquidity taps turn off”
The International Monetary Fund (IMF) suggests the same thing. Before the pandemic, crypto is “showing little correlation with major stock indices”. And though long “thought to help diversify risk and act as a hedge against swings in other asset classes”, crypto is appearing to not.
There appears to be “stronger correlations” with traditional equities markets suggesting that Bitcoin is not significantly different and is just a risky asset – devaluing it as a risk diversification tool. The IMF added that Bitcoin’s “correlation with stocks has turned higher than that between stocks and other assets such as gold, investment grade bonds, and major currencies.”
The wider crypto market is not so diverse either, despite CoinDesk arguing otherwise, the entire market tanked alongside Bitcoin earlier this month.
What is the point of having crypto as a payments tool if it is trending directly with inflation and the users must deal with significant price volatility ~10% is common a day?
“Not in the near future and probably never. Its value is just too unreliable for any corporate or customer at the moment. Maybe when salaries are getting paid in BTC but I find that hard to believe for the next nnn years. Imagine buying a car for 1 BTC and your salary is paid in USD. The car can easily be thousands of dollars more expensive or cheaper in a week’s time. I don’t believe the world is ready for that.” – Julius de Kempenaer, Senior Technical Analyst at StockCharts.com, a technical analysis and financial charting platform
Stablecoins have seen more success than Bitcoin-like crypto as they are very fast and cheap in terms of international payments settlement, but still have problems of their own. Notably significant questions about anti-money laundering compliance and their value. Their value lies in the belief that they are backed one-to-one by dollars and real liquid investments, however they are often backed by short-term corporate debt. Tether specifically only 2.9% backed in dollars.
Central bank digital currencies (CBDC) face their own challenges as well with the digital dollar still years off from launch by the federal reserve. Is a CBDC even necessary if the federal reserve is working with banks to create an instant payments system? Instant payments would resolve time efficiency, of the biggest issues in the current payments system.
Other than Bitcoin and other currency focused cryptocurrencies, most are not designed to be investments. They are designed as tokens that power decentralized applications.
In conclusion, “I feel we’ve gone too far down the road of bitcoin as a store of value asset rather than a payment method. More akin to gold than say euro, there may be some use cases as a payment method but I don’t think you’ll be using it to buy groceries anytime soon.” – Jeffrey Wang, Head of America’s at Amber Group, a cryptocurrency financial service firm.