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If Bitcoin is a 'inflation hedge,' why is it dropping in valuation?

The US Bureau of Labor Statistics released updated statistics for its inflation-tracking Consumer Price Index (CPI) this morning, indicating that US inflation had reached a 6.8% annualised rate. This results in the greatest year-over-year inflation rate since 1982, which is not good. The amount is just another nail in the coffin of US President Joe Biden's "Build Back Better" social expenditure package, among other things.

What about asset markets? As of this writing, Wall Street had already factored in 6.7 percent inflation, thus the Dow Jones Industrial Average has remained relatively constant. While gold futures have had a turbulent but substantial runup over the last six months as inflation fears grew, gold witnessed a slight but noteworthy morning boost.

Bitcoin, on the other hand, was flat to down this morning, down more than 25% in the last 30 days. That contradicts one of bitcoin's most popular selling points: that it's a "inflation hedge," a safe haven for money when fiat currency loses real-world value.

So, what's the deal? Why isn't bitcoin increasing in value as inflation in the world's largest economy hits record highs?

Here's a secret that your typical YouTube crypto shillfluencer will never tell you: Bitcoin's use as an inflation hedge is completely speculative. It's fascinating, and it may turn out to be true in the future, so it could be a good incentive to invest in bitcoin right now. However, it is not a mechanism that works in the modern world.

If bitcoin acceptance continues on its current course, it appears structurally plausible that it will eventually happen. If enough firms, economies, and individuals invest a significant portion of their wealth in bitcoin, its price will stabilise, making its consistent and strict issuance policy much more enticing and lowering the danger of rotating into it when inflation is high.

Some individuals utilise gold in this way, which is why bitcoin is sometimes called "digital gold." Nic Carter, a CoinDesk blogger and investor, recently stated that if bitcoin were to attain the same level of adoption as gold, it would represent a 10x increase in value from where it is currently. To me, that appears to be a very possible future scenario.

But that is not the case right now. Bitcoin prices are currently volatile for a variety of reasons unrelated to inflation, and if recent price movements are any indicator, these factors are far more potent than the "digital gold" myth.

To begin with, bitcoin has been on an almost two-year uptrend. A pullback was unavoidable due to the simple arithmetic of reversion to the mean and/or the emotional heaviness of profit taking.  That's especially true because bitcoin remains a speculative asset – its present total valuation of roughly $1 trillion (wow) is based on future growth scenarios rather than current adoption. Any speculative asset is particularly vulnerable to uncertainty: Tesla stock, which is now largely a bet on Elon Musk producing general artificial intelligence, has lost roughly as much as bitcoin in the previous 30 days.

This reflects concern about the real economy's strength, with the majority of it centred outside the United States. China, in particular, is beginning to exhibit signals of impending unrest, which might have global ramifications. However, debt and other types of leverage (including leverage hidden in stock prices) are at all-time highs almost everywhere.

As a result, things are choppy and could go in a variety of directions without warning. A significant downward shock would take a lot of the wind out of future-oriented assets, therefore some investors are de-risking to be safe.

The scenario, when compared to bitcoin's inflation thesis, reveals the most inconvenient truth of economics and finance: it's extremely difficult to prove why practically anything happens definitively. There's rarely never an opportunity for a "controlled experiment," in which only one variable is changed at a time, allowing the full influence of that variable to be examined. The only way to truly confirm bitcoin's status as an inflation hedge would be if there was nothing but inflation going on, which isn't something we'll ever see in the real world.

Instead, there are usually always a vast number of moving aspects in every economic or financial situation, including elements that even professionals may be completely unaware of. Picking the right moving pieces to focus on is crucial to forecasting the future. Inflation does not appear to be the tale the markets are listening to in the case of bitcoin, at least for the time being.