Bitcoin Is a Hedge Against Inflation, but It’s Also a Hedge Against ‘Crazy’ –

As the year that felt like a decade on speed starts to draw to a welcome close, some of us are starting to try to make sense of the timeline of narratives and events. Most of us (myself included) are failing. And that in itself is an intriguing narrative, that sheds light on bitcoin’s rally.

Bear with me while I try to explain.

On the one hand, we have a rapid rise in the bitcoin price, and coalescing institutional support from traditional investors and companies that see potential in crypto assets and markets.

On the other hand, we have conflicting economic and social trends. We have blind faith in the power of vaccines combined with rejection of the science of virus transmission; monetary policy designed to encourage lending combined with banks that are unwilling to do so; growing interest in the value of emerging markets combined with escalating risk of default; widening inequality combined with greater power of protest; I could go on …

These conflicting forces and the uncertainty swirling around them should encourage us to look closely at prevailing narratives. Yet those of us watching the growing institutional interest in bitcoin markets have accepted without question the assumption that bitcoin’s inflation hedge qualities are behind it.

First, let’s look at another pair of conflicting economic trends.

Most economists seem to believe that a resurgence of inflation is unlikely. Depressed consumption and excess supply, the continuing impact of technology and demographic shifts, the low velocity of money and the weak labor market are just some of the factors they point to. These have already led to deflation in some key economic areas.

The bond market, on the other hand, tells us that inflation concerns are real. The five-year breakeven rate, a proxy for inflation expectations calculated by taking the difference between five-year U.S. Treasurys and Treasury Inflation-Protected Securities, is close to its five-year high.

What’s more, the yield curve continues to steepen, signaling expectations of higher interest rates in the future as central banks tackle a looming inflation problem. Taking into account the damage rising interest rates would do to debt-laden economies, this is the bond market telling us that they see trouble ahead.

But does that really matter for bitcoin?

Bitcoin is seen as an inflation hedge mainly because of its limited supply, which is not influenced by its price, and because of its relative attractiveness when real yields head to zero or lower.

Yet when you buy bitcoin, you’re not just doing so to hedge inflation. You’re buying bitcoin to hedge all the other negative consequences that usually accompany it.

True, inflation is not always bad. “Good” inflation, a result of economic growth and low unemployment that helps to close…