Bitcoin supporters have long argued that the world’s most valuable cryptocurrency could act as an inflation hedge.
Bitcoin reached another record high and flirted for the first time with $ 69,000 after inflation data reinforced the argument that the crypto-currency is a hedge against rising cost pressures.
The largest digital asset by market value rose as much as 1.9% to $ 68,991 on Wednesday, surpassing the previous high on Monday in New York trading. Other currencies have also risen, with the Bloomberg Galaxy Crypto Index – which tracks major cryptocurrencies – rising as much as 2.4% to its highest level since May.
The rise in the token can be explained, at least in part, by the fundamental argument – which has gained traction in recent months – that Bitcoin could act as an inflation hedge. Crypto supporters argue that, unlike dollars or any other traditional currency, the digital currency is designed to have a limited supply so that it cannot be devalued by a government or a central bank that spreads too much of it.
“Bitcoin is still enjoying the rally that started in August and accelerated through September and October,” says Sui Chung, CEO of CF Benchmarks, a cryptocurrency benchmarks administrator. The latest leg of its rally began in anticipation of the October launch of a Bitcoin futures ETF, but “it now seems to be fueled by the sustained inflation we see in all of the world’s major economies.”
Prices for everything from food to gas to housing have progressed faster and have been tougher in recent months than many economists had expected. U.S. consumer prices rose last month at the fastest annual pace since 1990, confirming high inflation as a feature of the pandemic recovery and eroding spending power even as wages rise.
Major Wall Street players said they bought the coin – or were interested in it – thanks to the inflationary hedging thesis. Their case has been bolstered by the fact that gold, which is typically seen as an inflation hedge, has underperformed in recent months as Bitcoin has advanced.
Yet others argue that it does not have a long enough history to establish that it can in fact act as an inflation hedge. Cam Harvey at Duke University has made that argument in the past, saying that, theoretically, if investors consider it similar to gold, Bitcoin can retain its value over a very long period of time – as in a century or more. In his research on gold, he found that it holds its value well for millennia. But he also found that over shorter periods of time it was prone to mania and crashes.
Matt Maley, chief market strategist at Miller Tobacco + Co., says many investors see it as an inflation hedge, but he is not convinced it will work out well.
“I’m not saying it will – I just think gold has worked as an inflation hedge for centuries, so people should use gold in combination with Bitcoin as a hedge,” he said.
The spot price of gold has fallen by 1.8% this year, while Bitcoin has risen more than 130% in that period, according to data compiled by Bloomberg.
“People are looking for places to put their money,” JJ Kinahan, chief market strategist at TD Ameritrade, said by telephone. But, he added, “it’s hard to say whether it’s an inflation hedge or not, because we did not live through inflation with cryptocurrencies. It’s one of those things where everyone thinks it will be, but the time will tell. ”