With a supply-chain slowdown and increased market demand for products, we are entering 2022 with higher inflation than we’ve seen in some time. As the country attempts to recover from the adverse effects of the pandemic, economists and crypto-investors alike have bandied about positive notions about cryptocurrency being a hedge against inflation. Experts cite the fixed number of coins and capped circulation growth as a reason for this hedge distinction, calling crypto a form of “digital gold.”
However, Bryan Cannon of Cannon Advisors cautions against betting on crypto as a sure-fire hedge against inflation.
“Like most risk assets, cryptocurrencies could experience lower returns in 2022,” Cannon cautions, “The broader uptrend in bitcoin and other large-cap cryptos remain intact, albeit vulnerable to cyclical and technical swings, similar to what occurred last year.”
Here are five reasons why crypto may not be a hedge against inflation that we believe it to be:
Cryptocurrencies are famously volatile.
“High volatility means frequent drawdowns of up to 30%-50% could occur before a decisive price bottom is formed,” says Cannon. “For bitcoin, upside momentum has stalled after several failed attempts at an all-time high last year, which means sellers are in control heading into 2022.”
At the onset of 2021, the market experienced a cryptocurrency rush, and many investors saw immediate and large returns. However, by April and May of 2021, the market reclaimed many of those gains.
Crypto is still considered in its infancy, and this immaturity lends itself to increased volatility.
As of November 2021, the US Treasury Department was said to be working towards better regulation of cryptocurrency, including finding an solution to the many pump and dump schemes present today. But, since its inception (and in many ways still currently), there’s been a big Wild, Wild West feel associated with crypto. Being a decentralized and digital currency means that the various types of crypto range dramatically in regulatory bodies governing purchase, sale, and use. Regulators worry about a digital era bank-run, where people withdraw their money from traditional banks to invest in digital currencies instead, a move that could cause significant instability and widespread default.
Upon regulatory changes, “long-term holders could begin to realize gains quickly by liquidating positions ahead of strict regulatory measures, globally,” says Cannon, “This can trigger price declines across cryptocurrencies.”
- Speculative Nature
We’ve established that crypto is volatile and therefore unpredictable. These attributes lend themselves to crypto being speculative in nature. Crypto’s worth is based purely on speculation, a risky undertaking. Moreover, because of the general lack of regulation that we mentioned previously, a risk of rampant fraud exists.
Cryptocurrency is backed by blockchain technology, which is considered relatively secure. Every transaction undergoes an encryption process. However, blockchains can be hacked rather easily by adept hackers using the 51% Rule. If a single hacker gets access to more than 50% of nodes on a blockchain, they can authenticate any transaction, and even fake transactions. There are also risks of phishing hacks with cryptocurrency as well.
“In the digital age, there are bound to be phishing or social scams happening in our daily lives,” notes Jack Goh of Rewards Bunny, “More importantly we should be aware and cautious about clicking on suspicious links. When in doubt, always check with the official channels to make sure such messages are legit.”
“If the backbone of an online, peer-to-peer digital currency can’t be trusted, it would create dire consequences for crypto in moving forward”, Cannon says.
Cryptocurrency popularity is spreading. Even people not well-versed in investing or technology may find themselves Googling about crypto, wanting to know what all the fuss is about. But, it’s still developing, and people are still learning how to best apply crypto as a means of investing and purchasing. While some stores and companies accept crypto as payment for goods, it’s not yet a widespread practice.
Economists are keeping a careful watch on the crypto market to see its effect on our current inflation spike. While it remains to be seen precisely the role crypto will play in the financial story of 2022 and beyond, it would behoove investors to be diligent in their research and cautious in their choices to bet on crypto as a hedge against inflation.