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Inflation fears drive Bitcoin to new record high: are investors right to use it as a hedge?

Inflation fears drive Bitcoin to new record high: are investors right to use it as a hedge?
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Bitcoin, the flagship cryptocurrency that seems to be growing in popularity by the day, has hit a new record high bolstered by inflation fears. On 9 November, the coin breached the $68,000 mark (£50,300) to set a new record high before falling slightly to around $67,600 (£49,300) at the time of writing.

So, are investors right to be using Bitcoin as an inflation hedge? What do they need to know before they invest in this digital asset? Let’s find out.

Why is the value of Bitcoin rising?

At the start of 2021, Bitcoin rose by 60% in just four months before seeing its value plummet. But over the last month or so, the digital coin has boomed.

A major factor that may be causing investors to pile into Bitcoin is inflationary fears.

Last week, the Bank of England warned that inflation in the UK would peak at 5% next year. In the US, the median expectation is that inflation will be up 5.4% a year from now, which is the highest level for this gauge since June 2013.

These inflation forecasts appear to have spooked investors and savers, and many are putting their money into Bitcoin and other cryptocurrencies.

As Sussana Streeter, senior investment and markets analyst at Hargreaves Lansdown, says: “The recent surge in the crypto asset partly seems to have been caused by investors piling in, seeing it as a hedge against inflation.

“Some appear to have been enticed by the argument that the huge monetary stimulus programmes unleashed by the central bank are fuelling inflation, which will see the value of money decrease over time, whereas Bitcoin has a fixed limit on the number of coins which can be created.”

It’s not just the price of Bitcoin that has hit a new all-time high recently. The second most popular cryptocurrency, Ethereum has also recently surged to a new all-time high of more than $4,700 (£3,460).

What could happen to the price of Bitcoin going forward?

When it comes to cryptocurrencies, it is extremely difficult to predict what will happen next. Bitcoin and other digital assets can lose value just as quickly as they can gain it, and often without warning.

For proof, look no further than earlier this year, when the price of Bitcoin fell dramatically between April and July.

Having said that, some experts believe Bitcoin still has room to grow. Investment bank JP Morgan predicts that Bitcoin could reach $146,000 (£108,000) in the long term, though it acknowledges a drop to $30,000 (£22,000) is also possible.

What do investors need to know about using Bitcoin as an inflation hedge?

According to Streeter, investing in Bitcoin as an inflation hedge is not for the faint-hearted. She explains, “It’s a highly risky strategy given just how volatile the cryptocurrency is, amid other pressures on its valuation, like clampdowns by authorities and even comments on social media.”

Streeter also feels that Bitcoin’s new momentum “risks taking more vulnerable consumers for a roller coaster ride” given that its price could fall as easily as it has risen.

Many consumers get caught up in the excitement and fear missing out on rapid price gains. Some even go as far as borrowing money in order to invest in cryptocurrencies. In fact, according to the FCA, 14% of UK investors in crypto assets got into debt to make their purchases.

What other options are available to hedge against inflation or build wealth?

The good news for investors looking to hedge against inflation or simply build wealth is that there are plenty of other options that are less risky than Bitcoin.

One option is stocks and shares. Though the value of stocks and shares can also fluctuate, they are generally less volatile than cryptocurrencies and tend to have an upward bias over the long term. That said, past performance is not a reliable indicator of future results.

As with any other investment, investors should do their research before investing in stocks and seek professional advice if necessary.

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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