A hedge is an investment that is made to reduce the portfolio risk of adverse price movements in an asset. Headline U.S. inflation figures hit a 40 year high last month, far exceeding the market expectations. US Bureau of Labor Statistics data showed that the Consumer Price Index climbed 9.1% during the year through June before seasonal adjustment.
Bitcoin and Inflation
During the recent months, Bitcoin and other cryptocurrencies have failed to perform like a perfect hedge against the high inflation for the investors. Going forward, the headline global inflation is expected to be stubbornly high due to fractured supply chains and high commodity prices. The World Bank has recently reduced the global economic growth forecasts for the year 2022 to 2.9% amidst rising stagflation fears.
The risk-on assets like stocks and cryptocurrencies have seen sharp price corrections while the interest-bearing securities have seen renewed interest from the investors and traders. The US Fed has been forced to increase the interest rates by 150 basis points since Mar 2022 due to sticky inflation numbers which have been further exacerbated by the global geo-political reasons.
The major central banks including the US Fed are expected to go for further rate hikes throughout the year 2022, which might negatively impact investor appetite for risk-on assets while pushing more portfolio allocation to safe-haven assets like US Dollar and interest-bearing treasuries.
Cryptocurrencies as a hedge
In the post Covid era, Bitcoin and other cryptocurrency prices have traded in co-relation with other growth assets. Despite great returns for early crypto adopters and investors; the digital assets have failed to perform like a perfect hedge against the high inflation for the investors, and traders during recent months. The volatility in the digital asset markets and major price corrections have negatively impacted the liquidity for crypto miners and other important players in the ecosystem.
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Disclaimer: Cryptocurrency investment is subject to high market risk. The statements made in this article are for educational purposes only and should not be considered financial advice or an investment recommendation.
