We were told that holding Bitcoin would be a way to hedge against the effects of inflation. As prices increased, so went the thinking, Bitcoin would holds its value.
The world has seen a massive unleashing of price appreciation over the last 15 months or so. In the United States, the Consumer Price Index (CPI) is at 40 year highs. This certainly would qualify as a situation where Bitcoin should excel.
Of course, we all know this was not happened. Since its peak, Bitcoin dropped by almost 70%. This is the exact opposite of what should have taken place.
So what happened?
Bitcoin Misframed
Bitcoin is the leader in cryptocurrency. Hence, what applies to it is actually true throughout the entire industry.
We see the common rhetoric surrounding the idea of being an alternative to the existing system. From a transactional standpoint, this could be true. However, from a market perspective, we have to own up to the fact this is still extremely volatile.
Therefore, the idea of Bitcoin, or any other cryptocurrency, at this time being a store of value is misguided. The market emphatically told us this is not so.
In fact, the volatility that is common shows how this should be a warning. Anything that is apt to 65%+ drops is not in in the store of value category. Of course, this could change in the future although the fixed supply means volatility will always be standard.
Basically, we were told that Bitcoin was the safety net against economic headwinds and issues with the traditional financial arena. For all the discussion about the USD, when the proverbial you-know-what hits the fan, people move to cash. In this case, it is the USD.
Risk On/Risk Off
The proper perspective for Bitcoin (along with other cryptocurrency) is similar to Tesla or Amazon. The last 8 months shows us that it is the risk off trade. What this means is that when people are taking risk off the table, crypto prices will drop.
We saw what happened with the high P/E tech companies. As the risk off sentiment took over, they got rocked. Tesla, as an example, lost almost 50% of its value from the highs. Volatility is ever present in this realm also.
The positive is that we are also looking at cryptocurrency being susceptible to the risk on trade. When sentiment reverses, we can expect things to take off.
Fortunately, as we know, with cryptocurrency, when a direction is decided, the moves are powerful. Thus, we can expect the bull run to be fierce to the upside.
Of course, this is not following the typical narrative. For now, it is best to retire that. Bitcoin, nor any other cryptocurrency, is going to hedge inflation. It is a risky asset and the market will treat it as such.
The other major positive is that the trend, over the longer term, is higher. This is especially true for Bitcoin which ends up reaching new highs over time. Others like Ethereum will follow that path too.
For those who are patient, we will see high upside. When risk on takes over, it will likely be similar to a rocket ship.
This is the nature of what we are dealing with for now.
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