Bitcoin’s ‘Inflation Hedge’ Case Is Dead; Crypto Leader Heading To $12k

Ladies and gentlemen, I hate to say this, but BitcoinBTC
is not digital gold and the investment case of Bitcoin being an inflation hedge is dead. If you think the $20,000 price tag is back, wait until you see $12,000.

We all wanted Goldman Sachs to be right when they called Bitcoin digital gold. But like their call in 2008 that oil was going to $200 a barrel, sometimes the best minds get it wrong.

Historic inflation is pushing up the price of food and fuel, among other items. Some securities benefited as the market bet the Fed would not dare raise interest rates in the middle of a technical recession (the U.S. economy contracted for two consecutive quarters, the definition of a technical recession). Stocks did okay on this gamble. Despite the S&P 500 being down year-to-date, it’s way better than Bitcoin. In fact, the entire cryptocurrency market is a dud. Some NFTs are down 85%. Buying on the lows is like that old saying — “never catch a falling knife.”

Bitcoin, with its capped supply of 21 million coins, and Goldman Sachs’ “store of value” thesis (digital gold), meant the No. 1 traded cryptocurrency was supposed to be a hedge against inflation.

“Bitcoin is not immune to macroeconomic factors,” says Andrei Grachev, Managing Partner at DWF Labs, a Web 3.0 investor based in Zug, Switzerland. “Ongoing factors like the Federal Reserve’s decision on interest rates have affected market confidence greatly, and market uncertainty means investors will turn to low-risk assets. Unfortunately, Bitcoin is still seen as a newer, volatile asset to be a hedge, but I think Bitcoin is still going to be a highly profitable asset for middle and long-term investors.”

Unlike the crypto investors of the past who wanted to “hodl” Bitcoin forever, big money investors are more likely to sell Bitcoin now when markets turn defensive.

Bitcoin: Get Defensive

Getting defensive on Bitcoin basically means, don’t buy it. If you’re not buying the Nasdaq, then definitely do not buy Bitcoin. Build cash and wait for it to fall further, because everyone is convinced that it is.

Bitcoin’s tech stock correlation is over. “Crypto’s main drivers are still the dedicated, long-term holders,” says Przemysław Kral, CEO of Zonda, a cryptocurrency exchange based in Tallinn, Estonia, who thinks the Nasdaq correlation to Bitcoin is a thing of the past.

Last year and into early 2022, Bitcoin followed the Nasdaq rather than act like inflation hedge assets like gold. Bitcoin’s value should be, in theory, uncorrelated to the stock market. One has nothing to do with the other.

“The fact that Bitcoin’s price was so correlated to the financial markets indicates that we are still far away from Satoshi’s vision of decentralization,” says Abraham Piha, co-founder and CEO of Tomi.com, a decentralized cloud computing solutions provider for companies building the third generation of the internet – the blockchain space — best known as Web 3.0.

“The (cryptocurrency) market is still pretty centralized and controlled by Wall Street hedge funds, and their liquidity is damaging us as all,” Piha says from his office in New York City. “Only when we achieve real decentralization will Bitcoin be a hedge against inflation and a true store of value. Right now, the only real benefit is that it’s an asset that no one can take away from its owner.”

Billionaire investor Paul Tudor Jones called Bitcoin an inflation hedge last year. Mark Cuban dismissed the idea, calling it a “marketing slogan” for Bitcoin enthusiasts. Cuban was right.

What’s going on?

Since the birth of Bitcoin, we have lived in the era of low-interest rates that encouraged investors and speculators to put their money in risky assets. Nothing is riskier than cryptocurrency. Maybe slot machines and roulette are riskier.

Inflation Isn’t Helping Bitcoin

The recent decline in crypto prices is not really driven by inflation, but by the rising interest rates to clean up the excess liquidity in the market, clamp down on inflation, and strengthen the U.S. dollar because of rising rates. Rising interest rates mean higher Treasury yields, attracting foreign bond buyers from low-yielding nations like Japan and Europe. Leveraged Bitcoin bets have been cashing out as well.

Bitcoin hasn’t been around long enough to prove whether it’s genuinely an inflation hedge and a store of value. Despite its scarcity, the price of a cryptocurrency like Bitcoin is still mainly based on investor sentiment. It could still gain acceptance over time and become less volatile, but that has not happened despite some small headlines about companies accepting Bitcoin for payment. This is mostly true today in high-end real estate, often a money launderer’s delight, making Bitcoin the perfect match for luxury high rises in Miami and Dubai.

“If you zoom out over the last decade, then you can see that Bitcoin has performed better than most traditional stocks,” says Irina Berezina, the Lisbon, Portugal-based COO of Uplift DAO, a platform for cryptocurrency startups. She pointed out Blackrock’s recent foray into Bitcoin. They created a fund for their high-net-worth clients.

If BlackRockBLK
has started pumping client money into that fund, it’s been a money pit. Bitcoin was trading flat late Thursday. Bulls are looking for a break.

Bitcoin Bears in Charge. Until When?

The digital gold story isn’t working. The inflation hedge story isn’t working. The Bitcoin is a crypto Nasdaq isn’t working.

That could be changing. Remember, the last time Bitcoin fell below $10,000, it spent the next 12 months climbing to about $60,000.

“Rather than inflation, Bitcoin is a hedge against currency debasement and in its mature state offers an alternative to central banking,” says Ben Caselin, Head of Research and Strategy at AAX in Hong Kong. “In places like Argentina, Turkey, Nigeria or other countries where inflation has run high for decades, there is no question as to the ability for Bitcoin to act as a hedge against inflation.”

Sadly, El Salvador’s experiment with Bitcoin as legal tender seems to have hit a wall. Bitcoin as an alternative to fiat is barely a success story.

Bulls like Caselin are focused on the long-term story of Bitcoin.

But in the near term, they see Bitcoin losing that strong correlation with the stock market. Over the last two weeks, investors have been selling the S&P 500. Bitcoin fell in a big way on August 19 but has caught up to the S&P since. Over the last five days ending Labor Day, Bitcoin was down 1.1%, and the SPDR S&P 500 (SPY
) ETF was down 2.6%.

One thing in favor of Bitcoin is the currency market. The euro, pound and yen are at decade lows against the dollar.

“The dollar index is much moving in one direction and one direction only, and that is to the upside. Usually, when the dollar index picks up this much strength, we normally see Bitcoin price breaking down,” says Naeem Aslam, chief market strategist for AvaTrade in London. “Bulls are holding their ground. They have not allowed the Bitcoin price to get battered because of the tech sell-off and a strong dollar,” he says.

If there is a capitulation to the downside now that Bitcoin has breached $20,000, the next move isn’t going to be about the $18,000 price level or $15,000; the sell-off could be so intense that it could quickly push Bitcoin closer to $12,000, Aslam forecasts.

“My overall view is that the crypto winter will get worse before it gets better. Most professional traders I talk to are looking for 10,000 rather than 30,000 in Bitcoin. There’s a very limited buy side demand at the moment,” says Lars Seier Christensen, chairman of the Concordium Foundation and founder of Saxo Bank. “The Ethereum merge is unlikely to instill a real bullish feeling in the market, as the reality is it doesn’t change a lot.”

Alas, with economies looking weak because of inflation in Europe, and higher interest in the Western economies, Bitcoin failed to live up to its hype as the crypto inflation hedge.

Once it has been through a few market cycles, investors will better understand how Bitcoin responds to macro developments.

“There is a strong relationship between Bitcoin’s price and the dollar,” says Caselin. “The dollar has shown strength in recent months, so a drawdown in the dollar could kick off a rally in Bitcoin in the near term. But in the future, it’s more interesting to me to watch how Bitcoin and digital assets take root in emerging markets on the basis of use cases. Over time, such widespread adoption will stabilize Bitcoin’s growth and change the dynamics between the crypto and traditional markets.”

*The writer owns Bitcoin.