Can Bitcoin Cement its Position as a Hedging Instrument in the Midst of Economic Uncertainty?


Jul 2, 2019
Having money and money having value are two completely different things. Traditional currencies such as the US Dollar, Chinese Renminbi, Euro or Pound are all inflationary in nature due to the fact that central banks can print them whenever they want in whatever quantity they want. As a result, the money of today has more value than the money of tomorrow and significantly more value than the money of say, a year from now. Another factor that has weighed in on traditional currencies is the threat of market uncertainty. In the midst of economic turmoil or uncertainty in the financial markets, investors rush to move their investments into safe-haven assets to retain the value of those investments.

Gold has remained one of the most popular, if not the most popular, safe-haven asset to which investors turn in uncertain times. However, the emergence of a new asset class in the last decade, in the form of cryptocurrencies, has not only offered another avenue for investors through which to diversify their portfolios, but has also led many to believe that Bitcoin is “digital gold” and a good safe haven.

Why has Bitcoin Been Touted as “Digital Gold”?
One of the main reasons why gold has been popular among investors as a hedging instrument against inflation or uncertainty is the fact that gold is a scarce and limited resource, a characteristic shared by Bitcoin. There can only ever be 21 million Bitcoins, not a single one more, essentially making the digital currency a deflationary one, whose purchasing power, theoretically, increases every day. In addition, Bitcoin has several characteristics that make it superior to gold.

Bitcoin can be held, moved and managed far more easily than gold. The fact that Bitcoin resides on the blockchain and not in the physical world, allows it to be transferred almost instantaneously across physical and geographical boundaries together with being spent in a more comfortable way than gold.

However, the question remains: is this enough to make Bitcoin a good hedge against economic uncertainty and inflation?

Bitcoin Vs Gold: Is the Comparison Really Justified?
We are no stranger to Bitcoin’s volatility. The price fluctuations that Bitcoin undergoes on a daily, weekly or even yearly basis are factors that cannot be ignored, especially when we are looking to hedge our investments against them. Bitcoin traded at around $325 in early January, 2015 and remained somewhat stable for the next 12-15 months before receiving more attention from the investor community. Since then, Bitcoin has experienced several periods of volatility. At the beginning of 2017, one Bitcoin was worth around $1,000, then by year end, it went up to nearly $20,000 before crashing down to $3,500 by the end of 2018. The Bitcoin bulls rallied again in 2019 and the price has fluctuated between $3,700 and $14,000.

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