When cryptocurrencies first started gaining the attention of mainstream investors in early 2017, a number of crypto pundits were quick to claim that they could act as an effective hedge against inflation.
Citing the limited token supply of cryptocurrencies like Bitcoin BTC/USD as the chief reason, a coterie of influential crypto investors and enthusiasts believed this scarcity would propel cryptocurrency prices higher, even in a high-inflation environment.
However, ever since the 2017 boom that saw Bitcoin appreciating by nearly 1900% within the calendar year, cryptocurrencies have exhibited extreme price volatility and have moved in the opposite direction of the overall inflation trend.
In fact, Bitcoin has been under severe price pressure since the U.S. inflation rate grew from 4.7% in 2021 to 7.1% in November 2022, warranting a careful analysis of why cryptocurrencies haven’t proven to be a safe hedge against rising inflation.
Correlation With Equity Markets’ Price Trends Cementing Risk Asset Status
With high inflation rates often leading to value erosion of fiat currencies like the U.S. dollar, investors across the globe have always been on the lookout for safe havens.
In that sense, precious metals like gold have been the go-to asset class for both retail and institutional investors, preferring the yellow metal’s relatively low price volatility to other riskier asset classes during such times.
Against this backdrop, the hype around cryptocurrencies being able to theoretically negate the debilitating effects of inflation while increasing in value drew in hordes of millennial and GenZ investors to this digital asset class. With the younger generation even shunning other proven asset classes for cryptocurrencies, expectations of Bitcoin reaching the $100,000 mark in 2022 were running high.
Instead, the world’s leading cryptocurrency has eroded by more than 70% this year and almost erased all the gains recorded since the onset of COVID-19.
This is eerily similar…
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