I've heard a lot of people claim that Bitcoin is somehow a unique weapon to protect yourself from inflation. The current #cryptocrash should make you doubt that, but I used to work in 'inflation hedging', so let me offer a perspective to help you decide for yourself. Thread 1/15
I used to work in 'inflation derivatives' markets. I'll explain what those are, but let me start by saying that during that time I learned that there are basically four ways to hedge yourself against inflation...
The first is to invest in something that has inbuilt legal protection against a rise in inflation. The most well-known example of this are 'inflation linked bonds', which are legally required to increase their payout as inflation goes up (see for example, investopedia.com)
The second is to enter into a bet that inflation will rise against somebody who disagrees. These are 'inflation derivatives' (swaps, options etc). A counterparty bets against you & pays up to compensate you if inflation rises above a particular level (see investopedia.com)
The third is to buy an asset with current money and attempt to resell it for more money in future, thereby offsetting any losses in purchasing power with increases in the absolute amount of money you hold: (e.g. buy shares in companies that can charge more when inflation rises)
The fourth is to swap one inflating currency for one that is not inflating. Go to an FX dealer and get them to take your currency in exchange for another.
So which of these strategies are you following if you buy Bitcoin? Ta da, itās strategy 3, but it masquerades as strategy 4
So which of these strategies are you following if you buy Bitcoin? Ta da, itās strategy 3, but it masquerades as strategy 4
Because Bitcoin tokens (unlike shares or rare art) are *branded* as money & because they're highly movable, they have the superficial appearance of 'money'. This means this volatile asset can be pitched as if it were a ādeflationaryā currency that fights inflationary ones...
But really Bitcoin tokens are just a new contender in the inflation-hedging asset purchase category (no.3). They're not competing against the dollar. They are competing against shares, rare stamps, art, land and anything else that can claim to rise in monetary price over time
Rises in Bitcoin prices are not ādeflationā, any more than declines in Bitcoin prices are āinflationā. Bitcoin is a just another object on a dollar-denominated market. Itās changes in price are āasset appreciationā or āasset depreciationā
The first implication of this is that every time a Bitcoin promoter says āinflation is rising therefore buy Bitcoinā, they should also add āor shares, land, art, or any other potentially appreciating non-monetary assetā
Inflation is a phenomenon where all prices in a particular currency system shift up while their ratios relative to each other stay ā roughly ā constant. E.g. a coffee that once cost $3 and a sandwich that once cost $5 become $3.30 and $5.50, whilst maintaining a ratio of 3:5
This is different to a scenario where a sudden coffee shortage causes the coffee price to spike up to $4 while sandwiches stay $5, thereby changing the ratio to 4:5 (albeit, shocks to the prices of key imports like energy can cause the entire currency network to recalibrate up)
Bitcoin's price ratio to other goods in an economy wildly fluctuates, because really it's a speculative digital object which resists any attempts to calculate a 'fundamental value'. This means it's subject to extreme shifts in its dollar value relative to other goods on a market
If you happen to buy it at the right time and resell it at a higher price later, you may consider it an 'inflation-hedging asset', but if - for example - you bought it in Dec 2021, you've suffered a 47% loss, which hardly is going to compensate you for inflation...
Finally, bear in mind that the industry that promotes Bitcoin has to find every possible marketing strategy to push up its price. This means they engage in inflation fearmongering to create buying pressure for BTC, but without offering you advice on other options. Pls be careful.
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