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Can Bitcoin be an inflation hedge? JPMorgan thinks so

Can Bitcoin be an inflation hedge? JPMorgan thinks so
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Bitcoin has been making the headlines recently. The decentralised digital currency hit yet another all-time high at $68,000 on 10 November after reaching $67,000 the month before. Since Bitcoin was introduced to the world more than a decade ago, it has enjoyed a surge in mainstream popularity and acceptance, which is in part due to more widespread institutional cryptocurrency adoption from major companies, as well as the fact that cryptocurrency has found favour with governments and financial firms who are seeking to explore a world of payments beyond traditional banking services. 

Higher levels of cryptocurrency regulation and enforcement globally has broadened Bitcoin’s evolution towards more mainstream acceptance. Indeed, there’s a case to be made that cryptocurrency has proven itself as a growing sector. For instance, the total market capitalisation of all cryptocurrency assets surpassed $2 trillion for the first time in September, a tenfold increase since 2020. 

Also, Square invested $50 million and $170 million in Bitcoin (BTC) during the first quarter of 2020 and the first quarter of 2021 respectively, while Tesla invested $1.5 billion in BTC last year. PayPal also launched a new service enabling customers to buy, hold and sell cryptocurrency. All big news for Bitcoin, but there are more than 13,000 cryptocurrencies currently in existence and analysts have long been discussing Bitcoin’s longevity. 

Well, Bitcoin’s story has taken a new turn lately. The narrative has shifted from it serving as merely a digital currency to a store of value as a hedge against inflation and uncertainty around the U.S dollar’s future purchasing power. In fact, when it comes to hedges against inflation, Bitcoin is looking more and more like the new gold, according to a new note by JPMorgan

Bitcoin has outpaced gold year-to-date, with the digital coin up nearly 133% and the yellow metal down about 4%. With gold failing to act as a reliable inflation hedge, more than $10 billion has flowed out of gold ETFs and $20 billion has flowed into Bitcoin funds since the start of the year, according to JPMorgan. 

In another note, JPMorgan analyst Nikolaos Panigirtzoglou said the perception that Bitcoin is an effective hedge against the debasement of traditional currencies is the primary reason for its recent surge to a fresh record high.

The notes come as no surprise for those who have been following investments in Bitcoin in 2021. In April this year, Coinbase noted in its first quarter report that of the $335 billion trades the company hosted that quarter, $215 billion came from more than 8,000 institutional investors, an eight-fold increase in revenue from institutional investors over the prior year. A survey by the Financial Planning Association found that 14% of survey respondents recommend cryptocurrencies as a way to offset losses and beat inflation.

As Bitcoin soars to new heights, inflation is also increasing at record rates. While economic experts dither back and forth over inflation’s duration, we can all agree that inflation drives up costs while eroding the value of savings and the UK’s ongoing inflationary uptick is only set to worsen since the Bank of England predicts that annual price rises will peak above 4% and stay at the level into the second quarter of 2022. 

The new digital gold?

One of Bitcoin’s biggest advantages over other cryptocurrencies (and even fiat currencies) is that it can act as a hedge against inflation over time. Unlike other currencies, Bitcoin can’t be devalued by a government or a central bank distributing too much of it since there is a limited supply of tokens. In fact, there can only ever be 21 million in existence, which should theoretically help Bitcoin retain its value over time. 

Traditionally, gold has been thought of as a preserver of purchasing power during periods of sustained high inflation but gold prices have been flat for almost two years. As inflation has surged over the past year, gold has underperformed and its price has been steadily decreasing over the past 12 months.

Yet, talks of Bitcoin as the new digital gold requires several caveats. Bitcoin and other digital assets may be siphoning some capital away from gold, but it’s too early to say if it’s because they successfully hedge against inflation since Bitcoin’s role as a long-term store of value is currently untested with only eight years of quality data. What’s more, if inflation causes a recession, bitcoin could prove the opposite of a hedge against inflation if people respond by moving money into safer assets. 

Investing in Cryptocurrency is extremely high risk and complex. The Motley Fool has provided this article for the sole purpose of education and not to help you decide whether or not to invest in Cryptocurrency. Should you decide to invest in Cryptocurrency or in any other investment, you should always obtain appropriate financial advice and only invest what you can afford to lose.

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