September 27, 2022

Bitcoin is an inflation hedge, but only in some cases, says Steven Lubka, managing director of Private Client Services at Swan Bitcoin.

According to Lubka, Bitcoin is a good hedge against some inflationary pressures, such as quantitative easing, but against others, such as supply chain disruption, it performs less well.

Lubka’s comments come at a difficult time for both cryptocurrency and financial markets. Bitcoin is currently trading at $23,348, up 20.3% month-over-month, but down 44.1% year-over-year. Meanwhile, the S&P 500 rose 8.04% on the month, down 5.8% on the year to 4,129.

Understanding inflation

Inflation originally referred to the printing of fresh money against the provision of fixed collateral such as silver or gold. For years, however, fiat – physical paper money – has not been backed by such collateral.

Today, the term inflation is used to describe two different things that share superficial similarities in that they increase the price of consumer goods, but at their core are fundamentally different.

One is inflation caused by quantitative easing or money printing, the other is caused by increased scarcity of goods.

With US inflation currently at 9.1%, the highest level in 40 years, understanding the difference is becoming increasingly important.

“Inflation and what’s going on right now has caught the attention of the average person in a way that it never has before,” Lubka explained to What Bitcoin Podcast Did. “I think the average person, in the last couple of decades, didn’t care about inflation at all. And why should they? It was relatively low-key, it didn’t really affect their lives, but people are really feeling it today.”

The problem Bitcoin consumers and holders currently face, Lubka says, is that they are dealing with both types of “inflation” at the same time. The first guy was good for Bitcoin prices, but the second one was not.

“In the beginning, there was massive money creation – so the US is printing a ton of money to bail out of COVID and everything else. Bitcoin goes from 10,000 to 69,000, make no mistake, when they printed money and expanded the money supply Bitcoin was one of the best performing assets… Bitcoin hedged you against the expansion of the money supply.”

Here, however, is the sting in the tale.

As Lubka observes“Then we have this other inflationary wave that’s really focused on food and energy, and it’s because of the war, it’s because of the supply chain disruptions… Let’s be clear, the war was the spark that ignited everything, but we put create a bunch ignition for decades by not investing in these things.”

After the second inflationary wave, Bitcoin prices fell to where they are today.

Complex picture

Understanding inflation is not an easy task. As Lubka explains, the picture is complicated. While the recent drop in Bitcoin prices has challenged the rationale that BTC is a hedge against inflation, a better understanding of what inflation is provides a more nuanced view.

The good news for Bitcoin HODLers is that a less desirable form of “inflation” doesn’t always have to be permanent. Supply chain disruptions may eventually be resolved and prices may fall again.

The bad news is that such resolutions can be a long way off.

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