As the US Federal Reserve looks to tighten its extra-easy money policy, the investor hypothesis that crypto investments can act as an inflation hedge is failing a big market test. An alternative hunch that the pandemic-time crypto boom only reflected asset inflation as seen in other gainers found affirmation in a sharp slide since November when it became clear that the Fed must act. Most tokens have lost nearly half their value since that peak, including Bitcoin. Saturday’s tumble was partly traceable to the Russian central bank’s proposal to ban crypto mining and use, which could hit demand, but the “hedge” argument had priced in the hostility of monetary authorities.
Some early Bitcoin investors had argued that its supply limit meant its value would be inversely related to state-issued currencies subject to the folly of debasement as central banks went about over-issuing them. For some time, this seemed to hold. But, ironically, the very phenomenon it hedged against may also have inflated cryptos as a hot target of ride-the-wave speculation, turning them just as vulnerable to a Fed-policy reversal as other assets. Expect high crypto volatility this year and much less hedge talk.
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