Is Cryptocurrency The New Hedge Against Economic Turmoil?

Many cryptocurrency investors believe that Bitcoin and other altcoins will turn out to be a great hedge against hyperinflation.

Indeed, this was one of the original motivations of Bitcoin’s pseudonymous creator Satoshi Nakamoto. Bitcoin was formed just after the 2008 financial crash, and Nakamoto believed that a decentralized currency would be the solution to ensure that the economic turmoil that ensued could never happen again.

Inflation is largely caused by the central banks altering currencies through processes such as quantitative easing, which is why Nakamoto limited the supply of Bitcoin and ensured the speed at which they are mined could not be altered.

There has been no serious market crashes since 2008, so Bitcoin’s value as a hedge against hyperinflation has yet to be tested. Below, we explore how it might perform in a poor economy.

How investors act during a market crash

Whenever there are signs of a financial crash, smart investors move their money away from fiat currency and assets that tend mirror the local economy (such as cash, property, and stocks and shares) into assets that are considered a hedge against the economy.

Gold is considered the most reliable hedge against inflation, largely because its supply is limited and barely affected by economic conditions.

Bitcoin has both of these attributes. As its popularity grows, it has been suggested that many investors will pump money into this and other cryptocurrencies, following signs of the next market crash.

The case for turning to Bitcoin as a hedge against inflation

The limitless nature of Bitcoin means there’s no way its value can be affected by inflation. This is the exact reason why so many people turn to precious metals during market crashes, so it makes sense that some people may turn to Bitcoin instead during the next crash instead.

Bitcoin has an advantage over precious metals, as it can be spent on everyday purchases, albeit with a limited amount of retailers at this time.

The case against turning to Bitcoin as a hedge against inflation

Gold is seen as a reliable hedge against inflation because its value has historically always risenduring a slow economy. There is not yet any similar evidence that investors will turn to Bitcoin in a similar situation. Any investment in Bitcoin during a crash will therefore largely be based on speculation.

Bitcoin also remains a volatile investment, which typically doesn’t make an effective hedge. Investors are traditionally looking for stability during market crashes, and it’s tough to argue that Bitcoin will provide this in any market conditions. As such, gold may still be a safer bet.

Many people are excited about Bitcoin, but it remains too early in its lifespan to confidently predict its long term value in any market. If you do choose to invest in Bitcoin as a hedge against inflation, make sure to do your own research into the pros and cons of doing so beforehand.