Bitcoin, an Inflation Hedge?

1. Bitcoin Let’s explore this narrative and market trends

Bitcoin is a global trust-less payment network. Unlike anything before, it’s available to anyone, anywhere in the world. The governing software is not controlled by any one group or government. It is entirely decentralized and highly secure. The maximum amount of bitcoin is set to 21 million. This number is immutable. In an environment where the strongest economy and currency, the USD, is inflating due to reckless issuance, its natural for capital to find hard assets that cant be abused, like bitcoin. This is where the narrative of inflation hedge stems from.

Why has bitcoin declined when inflation is on the rise?

While the argument for inflation hedge is strong and sensical,  continues to trade as a risk-on/ risk-off asset. For years, the  community has been waiting for institutions to realize the value bitcoin offers. Over the last year, many publicly traded companies have incorporated bitcoin in their treasury, most notably, MicroStrategy and Tesla. While institutional adoption continues to grow slowly, hedge funds and private equity are joining behind the scenes. We have seen developing countries such as El Salvador and Central African Republic adopt Bitcoin as legal tender. There will come a tipping point, where  decouples from the traditional market and emerges as a safe haven for times of uncertainty. Its clear we aren’t there today, but it could arrive tomorrow, literally.

There are many market experts and technical analyst that confidently predict future prices and are consistently wrong. Some are TA driven, while others are sentiment based. What seems clear from the past, is price leads narrative, more often than the opposite. Some experts are saying that we have not bottomed yet, and until the US economy improves, the Fed continues to raise rates, markets remain uneasy and the selloff will continue. Until we see a decoupling from traditional markets, I believe its fair to say that Bitcoin is not an inflation hedge just yet. We are early. In theory it is an inflation hedge, but adoption and shared sentiment, is not there yet. It would be wise to approach bitcoin with a 1 plus year outlook.

What will it take to establish widespread adoption?

Adoption happens slowly when its not necessary. Currently only a few countries are adopting , because they are in a tough spot in terms of their currency against the USD and they have very little to loose. As the economy struggles and inflation persists, there will come a point where Bitcoin in relative to USD will rise. In simple terms, dollar supply increases (infinitely), while bitcoin total supply remains the same. This comparison of  makes the case for it serve as store of value. Another feature  offers is a micro payment system. The lightening network, which runs on-top of the  blockchain, allows for quick settlement payments that are cheaper then visa payments. I don’t see how out current credit card processing system can compete when lightening goes mainstream.

What does the network data tell us?

Mining Hashrate has reached an all time of 226 million terra hashes. Total Hashrate is the aggregate of network miners competing to add the next block to the blockchain. This competition of resources is what secures the network and demonstrates a high level of confidence for bitcoin holders. The number of unique wallet addresses is about 800K, which is lower than its all time high of 940K, from this past January. This doesn’t include bitcoin stored on centralized exchanges, so its less revealing. The lightening network is continuing to grow. Currently there are 78K payment channels connected on the network, slightly down from an all time high of 84K this past February. Countries are encouraging the use of lightening network as a payment system, as well as companies, such as cash app and brokerage accounts.

In conclusion

Its clear we are in bear territory, as economies struggle to achieve equilibrium after the pandemic shut down. This uncertainty in the traditional markets can be seen in cryptocurrency prices, as they are very much correlated. Its evident that bitcoin is being considered a tech stock, although its fundamentally worlds apart. While short term its hard to determine if we have seen the bottom, over a longer horizon we can be very optimistic with cryptocurrency adoption.