Read now to learn how Bitcoin’s exchange rate is impacted by more than just inflation of fiat currencies.
It has been a rough few months for financial markets. Inflation in the United States and around the world has been significantly higher than usual, and that trend is accelerating as time goes on. Couple that with actions being taken by the Central Bank in charge of the world’s reserve currency, the Fed, which is attempting to combat rising inflation by hiking the base interest rate on which a significant portion of the world economy operates. The result? Stocks are down, real estate markets are cooling, crypto assets are tanking, and Bitcoin is struggling to regain its bull market.
But wait…isn’t Bitcoin supposed to be the quintessential inflation hedge? Isn’t Bitcoin’s hard cap of 21 million coins supposed to push its exchange rate against weak fiat currencies ever upwards?
Bitcoin maximalists like me have been preaching about Bitcoin’s resistance to inflation for quite some time. So why is Bitcoin not outperforming during this period of extreme inflationary pressures? Why is Bitcoin seemingly following the same trends as the rest of the market?
The answer is that there’s more to it than meets the eye.
Bitcoin Is Not An Investment…But People Treat It Like One
Bitcoin For Speculation
We spoke a couple weeks ago about how Bitcoin is money, and that treating it like a speculative investment is the wrong way to go about interacting with Bitcoin. But even though I strongly believe that Bitcoin isn’t supposed to be used for speculation, that doesn’t change the fact that a ton of people treat it like a speculative money-making investment.
To a certain degree, the fact that a lot of people approach Bitcoin with that frame of mind is understandable. Our societies have operated for decades on weak fiat monies that lose a portion of their value every year to inflation. In no small way, fiat currencies have trained us to believe that we need to be financial analysts and asset managers just to scrape together enough wealth to have some sort of retirement when we’re old. So does it make sense that a lot of people would approach Bitcoin with the same mentality of making money that has been ingrained in their psyche in every other financial market out there? Yes, it does.
But the reality is that the vast majority of us aren’t financial analysts or asset managers. And even some people who are still aren’t actually very good at investing. In short, if someone is simply speculating with their life savings or their latest paycheck in the hopes of eventually trading in their Bitcoin for more fiat than they had before, they’re going to get spooked when the Bitcoin exchange rate goes down and sell out as fast as possible.
So why does Bitcoin tend to follow other asset classes downwards when times are hard? In part it’s because speculators are getting shaken out of Bitcoin just like they’re getting shaken out of other financial markets.
Why else does it tank?...
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This is not financial advice. This newsletter and related content are for informational purposes only. Cryptocurrencies and digital assets can be risky. Always do your own research before making any sort of investment.
