Bitcoin Fails As Inflation Hedge? What the current global situation tells us

Bitcoin has felt the effects of war, just like the rest of the world. The current geopolitical situation generates uncertainty for both households and markets. The million dollar question for bitcoin appears to be whether it can still act as a hedge against inflation or February has proven otherwise.

Geopolitics and Bitcoin

A report by QCP Capital points out that historically there has been a poor correlation between BTC and gold prices, raising the question of whether the digital asset can be treated as an inflation hedge to help protect the value of investments and individuals’ savings.

Sanctions against Russia will be felt by everyone around the world. Global oil and gas prices have already risen and are expected to escalate further. Inflation is increasing as the economic impact of the pandemic is accompanied by war.

Investopedia explains that “Assets that are considered an inflation hedge may be self-fulfilling; investors are drawn to them, keeping their value high, even though the intrinsic value is much lower.”

For this reason, gold has been the best hedge against inflation for years. And bitcoin has long been described as “digital gold,” but the small correlation between them in times of risk-out means the digital asset has traded more as “a high-beta leverage with a strong correlation to Tech and NASDAQ.”

Bitcoin and gold show poor correlation over time | Source: QCP Capital

However, there are more things to consider as we enter an important point in history for the crypto market and blockchain technology.

The report further notes that “where BTC now has a more crucial macro use case is its ability to serve as the primary weekend hedge for event risk while traditional markets are closed.”

By providing cash and option liquidity at all times, it works as the new last resort hedge for traders who previously used Middle Eastern markets. Also, Bitcoin has proven to reflect downside risk before other markets can open.

In addition, Coin-Crypto recently reported how gold outperformed Bitcoin after Russia launched its attack on Ukraine, but the digital currency reversed its dominant position after recovering to around $40,000 last Thursday as gold fell.

Related literature | Bitcoin Volumes Rise as the Ruble Falls

While investors initially rushed to gold amid geopolitical concerns, it is precisely in these times of turmoil when bitcoin is making its case, as it is more accessible, easier to move and use — as a form of money — than gold.

And BTC is rising today

In a Fox Business Live with Euro Pacific Capital CEO Peter Schiff and journalist Layah Heilpern, the stockbroker continued to criticize BTC, preferring only gold. He has been claiming for years that the digital asset will drop to $0 and that it “will not hedge against anything”.

More than ready with her bitcoin arguments, Heilpern hit back by saying that Schiff’s projection never materialized and that bitcoin’s fundamental value has worked perfectly during this year’s turmoil:

“You can’t trade gold peer-to-peer. Bitcoin is literally an alternative monetary system.”

As Heilpern explained, you can’t send donations in gold to Ukrainians—or anyone else for that matter; you cannot flee from a country that carries gold bars.

Related literature | Possible scenarios for Bitcoin, how the market has reacted to past wars

Reportedly, amid frozen bank accounts, many citizens from Ukraine and Russia have started using BTC as both populations have been badly affected by a war they did not start.

In addition, the war will only drive US inflation higher, and the case for Bitcoin is far from closed, as mass adoption is a possibility that would likely shift the stories entirely in its favor.

Moreover, the digital currency has increased in price today. Trader Sven Henrich shared his take on the current Bitcoin rally. The expert claims that there are four main reasons for this:

Fundamental: “Adoption & acceptance continues to grow, ie #ebay but also institutionally. I believe this road will continue. There is no sign of decline, but of continued expansion.”
Sentiment: “The crisis in Ukraine shows how Bitcoin can act as a support mechanism to raise funds when traditional avenues are cut off. Blockchain & decentralized money to become more relevant.” Technical: “Bitcoin made a higher low against equities in February, showing positive divergence and defense of an important trend. Start of correlation decoupling process?” Safety Trade: “Sanctioned money may seek Bitcoin as a safe haven (unconfirmed) This also invites risk as it gives an excuse to accelerate regulation (long term positive/short-term risk).” Bitcoin Back to $41,154 in Daily Chart | sources: BTCUSD on TradingView.com

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