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Is Bitcoin Still Hedge Against Inflation? BTC Markets Correlation

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Is Bitcoin Still Hedge Against Inflation? BTC Markets Correlation

Cryptocurrencies are becoming increasingly dependent on the macroeconomic environment of which they inevitably become a part. Unfortunately, current inflation rates in the United States, Europe, and many other countries around the world make this environment hardly encouraging for investment. However, the specter of recession, rising consumer prices, and loss of purchasing power by fiat are causing investors to seek an escape from inflation.

For years, there has been a strong narrative describing Bitcoin (BTC) as one of the best hedges against inflation. The parabolic rise of cryptocurrencies combined with the increasingly weakening purchasing power of fiat currencies only added fuel to this interpretation. However, the argument strength of advocates of the oldest and largest cryptocurrency has weakened in the trajectory of the year-long bear market.

Can the thesis that Bitcoin is an inflation hedge still be defended in 2022? Does the correlation with traditional and technology markets make us treat BTC as another risk-on asset? Or should we return to the narrative from the previous bull market that Bitcoin is digital gold and the safe haven of blockchain technology?

Bitcoin is a hedge against inflation – why such a promise?

Why should Bitcoin be considered a hedge against inflation at all? There are at least two groups of arguments used to justify this thesis.

The first concerns the fundamental properties of Bitcoin. Unlike fiat currencies, BTC has a very transparent monetary policy that is not dependent on any individual entity, commission, or central bank. Bitcoin cannot be “printed” as its total supply has been cryptographically fixed at 21 million BTC.

Subsequently, Bitcoin’s inflation rate – yes, BTC is not deflationary, as some people believe – remains at a stable, low level. It currently stands at around 1.8% per year. These levels are predetermined and cannot be changed. Moreover, Bitcoin’s inflation rate decreases every 4 years or so with successive halvings. Each such event, of which there have been 3 so far in Bitcoin’s 13-year history, halves the inflation level.

Bitcoin inflation over time / Source: bitcoinblockhalf.com

No institution, individual miner, or BTC whale not only has the power to change this but also has no interest in a potential modification. Bitcoin’s monetary policy is doubly protected: by cryptographic (blockchain) and energy (Proof-of-Work protocol) security.

The second group of arguments for the thesis that Bitcoin is a hedge against inflation concerns its long-term results as a trading object. There are precise calculations saying that no one who bought BTC at any time and held it for exactly 3 years, 4 months, and 4 days is at loss.

Even a glance at BTC trading history makes it easy to determine that the long-term trend is simply upward. Despite brutal bear markets that brought the price of BTC down 86% in 2014, 84% in 2018, and 75% in 2022, Bitcoin has the nature of a Phoenix reborn from the ashes. Except that it is always reborn stronger, and the level of increases in successive bull markets is best expressed on a logarithmic scale.

hodl chart
HODL line / Source: hodl.camp

BTC weaker than avocado

Despite the above arguments and the well-known history of BTC trading, the inflation hedge hypothesis is again being questioned today. The reason is the brutal bear market that has been going on since the end of 2021 and throughout 2022. It has pushed the BTC price 75% below the all-time high (ATH). Bitcoin has fallen from the 69,000 level reached in November 2021 to the current low of $17,600 in June 2022.

It’s hardly surprising, then, that some investors – who bought cryptocurrencies at the high end of last year’s bull market – would have happily opted for inflation in their fiat money. This currently stands at 8.2% in the United States and 10.7% in Europe. Even such high numbers are more favorable than a 74% drop:

Inflation is up 8.2%

While #Bitcoin is down 82%

Day by day, the false “inflation hedge” narrative is falling apart.

— Vinco (@CryptoVinco) October 13, 2022

Some Twitter users poke fun at the inflation hedge narrative by juxtaposing Bitcoin with various assets and commodities. For example, @MacroAIf____ compared BTC to avocados, claiming that “avocados are still a better inflation hedge than Bitcoin.”

Correlation with traditional markets

So why – despite all its fundamental and technical advantages – is Bitcoin losing out to avocados over the past several months? One reason is the strong positive correlation of cryptocurrencies with traditional markets, especially technology indexes. Bitcoin supporters are not at all happy about this, as in the past there have been attempts to view BTC as an asset uncorrelated with the SPX or NASDAQ.

However, 2022 has brought quite a few changes. Over the past year, a very strong positive correlation with the bleeding stock market has formed. Such a strong long-term combination of cryptocurrency and traditional stock markets has not been recorded before.

In the chart below, we see the daily correlation coefficient between Bitcoin versus the NASDAQ (blue) and SPX (blue). It has been almost exclusively positive and very high since the beginning of 2022 (yellow area). The correlation with the NASDAQ index of tech companies has remained at 80-90% for most of the year, and with the SPX index at around 70-80%.

BTC USD
BTC chart by Tradingview

Moreover, the correlation with the traditional market is particularly evident during periods of macroeconomic data releases. These include especially new data on the level of inflation, unemployment, or Fed conferences on interest rate hikes.

This was recently pointed out by user @VetleLunde, who tweeted data from October 2022 about Bitcoin’s correlation with NASDAQ, SPX, gold, and DXY. Based on them, he concluded that the markets are more correlated during US trading hours and the publication of inflation data (October 13). Thus, we see that U.S. investors are currently looking at Bitcoin more as another risk-on asset than as a hedge against inflation.

BTC correlation
Bitcoin correlation against traditional markets, gold and DXY / Source: Twitter

Negative correlation with the dollar

A consequence of viewing Bitcoin in a similar manner to tech stocks is the negative correlation with the U.S. dollar index (DXY). Indeed, if one compares the long-term charts of BTC and DXY, the inverse relation is obvious.

All Bitcoin bull markets (green at the top) correlate with declines in the dollar index (red at the bottom). Conversely, BTC bear markets coincide with DXY increases. In addition, the strong inverse relationship is confirmed by the correlation coefficient at the bottom of the chart. During all periods with strong trends, the correlation was almost exclusively negative (gray areas).

BTC Chart
BTC chart by Tradingview

Conclusion: Inflation is a hedge against BTC

Many on-chain indicators show that the fundamentals of the Bitcoin network are as strong as ever. Moreover, the global adoption of cryptocurrencies is proceeding rapidly, with institutional investors becoming dominant actors, driving the price of BTC.

However, the entry of blockchain technology into the mainstream comes at a price. It is the acceptance that Bitcoin is becoming a part of global finance, and the influencing factors may be different than Satoshi Nakamoto initially envisioned. Therefore, a strong correlation with traditional markets or the perception of BTC as a high-risk asset is not something undesirable.

This is another stage of cryptocurrencies entering maturity. Over time, the level of volatility so characteristic for cryptocurrencies and tempting for traders will weaken. The bottoms won’t be so low, and the peaks won’t necessarily be reached in the parabolic euphoria of retailers.

Another impressive feature of Bitcoin is its adaptability and ability to fit into different, often mutually exclusive narratives. Bitcoin is not “just” a hedge against inflation, “just” digital gold, or “just” another risk-on asset. Bitcoin has ignited a new, previously unknown class of digital assets, the Cambrian explosion which we are currently experiencing.

The goal of this rapid digital evolution of money is to improve the flawed mechanisms based on fiat currencies’ “thin air”. And even if it sometimes feels like “inflation is a hedge against Bitcoin,” we must not see forest for the trees. And Bitcoin’s forest is just now emerging.

For BeInCrypto’s latest Bitcoin (BTC) analysis, click here.

Disclaimer

All the information contained on our website is published in good faith and for general information purposes only. Any action the reader takes upon the information found on our website is strictly at their own risk.

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Bitcoin (BTC) Price Slips as US Labor Market Figures Hotter Than Expected

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Bitcoin (BTC) Price Slips as US Labor Market Figures Hotter Than Expected

Bitcoin fell 2% to around $16,800 after the Nov. 2022 U.S. jobs report revealed a strong labor market, despite the Federal Reserve’s six consecutive interest rate hikes in 2022.

Nonfarm payrolls increased by 263,000, beating the Dow Jones estimate of 200,000, while the unemployment rate matched expectations at 3.7%.

Jobs Report Signals Fed Hikes Are Likely to Persist

The gain in nonfarm payrolls came in slightly lower than the revised Oct. 2022 increase of 284,000, while average hourly earnings rose 0.6% compared to estimates of 0.3%.

The U.S. Bureau of Labor Statistics releases the nonfarm payroll and average hourly earnings at 8:30 E.T. on the first Friday of every month as part of the Employment Situation report.

While rising employment rates and wages generally point to a healthy economy, wages that grow too fast, especially in the presence of record levels of inflation, encourage the Fed to continue raising interest rates to ensure that the economy doesn’t run red-hot. 

“To have 263,000 jobs added even after policy rates have been raised by some [375] basis points is no joke,” noted Seema Shah of Principal Asset Management. “The labor market is hot, hot, hot, heaping pressure on the Fed to continue raising policy rates.”

Raising policy or interest rates cools economic expansion, but if done too aggressively, it could significantly curtail employment and pitch the economy into a recession. Recession fears generally create selling pressure on risky assets like cryptos and equities, driving prices into bear territory.

Cryptos ceded gains accrued earlier this week around a lower-than-expected Personal Consumption Expenditure Price Index of 0.2% for Nov. 2022. 

At press time, XRP was down about 2.5%, while DOGE fell 3.78%. Solana also declined by 1.1%. Equities markets also tanked, with the Dow Jones Industrial Average falling 0.9%, the S&P 500 1.2%, and the tech-heavy Nasdaq slid 1.5%. 

Crypto price heatmap
Source: Coin360

Elsewhere, gold is outshining Bitcoin as an inflation hedge and trading back at its price at the beginning of the year, $1,800 per ounce. By comparison, Bitcoin has fallen 63% in the same period.

Jobs Report and Inflation Still Likely to Influence Crypto Prices

The higher-than-expected Nov. 2022 nonfarm payroll number is the lowest jobs gain since April 2021, coming after a revised increase of 284,000 new jobs in Oct. 2022.

Nonfarm payroll increases in 2022
Source: TradingEconomics

The most significant adjusted increases in the nonfarm payroll were noted in the Feb. 2022 and July 2022 jobs report. The Feb. 2022 report revealed that nonfarm payrolls increased by 714,000 in Jan. 2022, prompting the Fed to step in with a 25 basis-point hike in March. 

The following four reports pointed to a cooling down of the labor market, which then picked up again in June 2022, when the Fed introduced its first 75 basis point hike of 2022.

On Nov. 30, Fed chair Jerome Powell noted that less aggressive rate hikes might be a distinct possibility at the next Fed meeting, although most analysts do not expect a drastic fall off from the last four increases of 0.75%. 

They predict that the Fed will increase interest rates by 50 basis points at the next Federal Open Markets Committee meeting in mid-Dec. 2022, taking the federal funds rate above the 4% mark. 

The Fed meeting will likely spark a rally in both cryptos and stocks if analysts’ estimates prove accurate.

For Be[In] Crypto’s latest Bitcoin (BTC) analysis, click here.

Disclaimer

All the information contained on our website is published in good faith and for general information purposes only. Any action the reader takes upon the information found on our website is strictly at their own risk.

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EU Parliament to ‘Vote on Adopting the Regulation on MiCA’ — Expert Says Industry Needs Legal Clarity

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EU Parliament to ‘Vote on Adopting the Regulation on MiCA’ — Expert Says Industry Needs Legal Clarity

In a recent statement, the European Parliament said its members would shortly “vote on adopting the regulation on markets in crypto-assets (MiCA).” According to the parliamentary body’s think tank, the envisaged regulations are expected to provide “legal certainty for crypto-assets not covered by existing EU legislation.” A crypto counselor, Paulius Vaitkevicius, said any regulation of crypto is likely to result in more capital and talent coming into the space.

‘Harmonized Rules’ for Crypto-Assets at EU Level

After months of discussions and negotiations which culminated in the June 30 preliminary agreement, the European Parliament (EP) is now set to “vote on adopting the regulation on markets in crypto-assets (MiCA).” The vote is set to take place during the legislative body’s plenary session. European leaders assert that the adoption of MiCA will lead to the creation of “harmonized rules for crypto-assets at [the] E.U. level.”

According to a Nov. 29 briefing by the parliament’s think tank, the harmonized crypto rules are expected to provide “legal certainty for crypto-assets not covered by existing EU legislation.” In the briefing, the EP also argues that the rules will not only enhance the protection of consumers and investors but will also “promote innovation and use of crypto-assets.”

Through MICA, European authorities also hope “to regulate [the] issuance and trading of crypto-assets as well as the management of the underlying assets.”

While European leaders like European Central Bank president Christine Largade are pushing for tougher regulation — MiCA II — some critics of the proposed legislation argue that the envisaged regulations in their current form may stifle innovation.

Legal Clarity Attracts Mature Players

Commenting on the European Union’s drive to regulate cryptocurrencies, Paulius Vaitkevicius, founder and crypto counselor at the law firm VILP Solutions, said the prevailing “Wild West environment” is not helpful to all parties. He also told Bitcoin.com News that without guidelines or regulatory frameworks “and with a number of situations where industry players collapse, we might end up in a situation where we will have only a handful of investors left in the industry.”

EU Parliament to 'Vote on Adopting the Regulation on MiCA' — Expert Says Industry Needs Legal Clarity

Therefore, to stop this from happening the crypto industry needs legal clarity, which according to Vaitkevicius, “bring[s] in more mature players to the industry from both project and investor sides.” Explaining why he is in favor of regulating the industry, Vaitkevicius said:

From my personal experience, such players have been seeking regulations and clarity already for some time and waiting for the right moment to step in properly. With regulations, we will see these firm steps and as a result additional capital and talent coming to the industry space.

Meanwhile, some crypto opponents have said if appropriate regulatory frameworks were already in place, Sam Bankman-Fried’s shenanigans would have been exposed much earlier. However, when asked about the validity of this argument, Vaitkevicius said the opinion that on paper FTX itself was “one of the most regulated players in the industry” undermines this theory. He added:

“Regulation is a good step forward, but [this] needs to be followed by other elements to be functional in real-life situations and achieve the pursued goals.”

What are your thoughts on this story? Let us know what you think in the comments section below.

Terence Zimwara

Terence Zimwara is a Zimbabwe award-winning journalist, author and writer. He has written extensively about the economic troubles of some African countries as well as how digital currencies can provide Africans with an escape route.

Image Credits: Shutterstock, Pixabay, Wiki Commons

Disclaimer: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.

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Uzbekistan Approves Rules for Issuance and Circulation of Crypto Assets

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Uzbekistan Approves Rules for Issuance and Circulation of Crypto Assets

Uzbekistan Approves Rules for Issuance and Circulation of Crypto Assets

The authority responsible for crypto oversight in Uzbekistan has determined the order of issuing and circulating digital assets in the country. The main reason behind the move is to establish a mechanism that would allow local companies to attract capital through coins and tokens.

Uzbekistan Government Sets Out to Regulate Digital Asset Investments

The National Agency of Perspective Projects (NAPP), under the President of Uzbekistan, has released a new regulation on the procedures for the issue, registration, and release in circulation of crypto assets in the Central Asian Nation.

The document provides basic legal definitions for crypto assets and makes distinction between the different types. It introduces requirements for crypto issuers, depositaries and custodians and determines their obligations, including those concerning relations with customers.

The authority has also approved rules for the establishment and maintaining of an electronic register of crypto assets and adopted accounting standards for the rights associated with them and those of their holders.

Crypto depositories will be responsible for providing services for the issuance, registration, circulation, and storage of crypto assets. Issuers can use them or other electronic platforms, the NAPP said, pointing out that the nominal value of the coins must be expressed only in the national fiat, the Uzbekistani som.

The agency emphasized that the issuance of unsecured tokens is prohibited. Using words such as “state,” “state-secured,” “state-supported,” “Uzbekistan,” “Uzbek,” “national,” and “som” in the names of the cryptos is banned. The regulator also clarified:

The main purpose of the adoption of this document is to create a new mechanism for business entities to attract investments and develop their activities by issuing and registering the issue of secured tokens.

The NAPP further warned against any unauthorized activities related to the circulation of crypto assets in the country or the use of services by providers that have not obtained a license to offer them. The same applies to firms involved in the mining of cryptocurrency.

Uzbekistan has been taking steps towards the comprehensive regulation of its crypto sector with several decrees signed by President Shavkat Mirziyoyev and resolutions by the National Agency of Perspective Projects. The country recently licensed two companies to provide exchange services.

Do you think Uzbekistanis will benefit from the new regulations adopted by the country’s crypto watchdog? Tell us in the comments section below.

Lubomir Tassev

Lubomir Tassev is a journalist from tech-savvy Eastern Europe who likes Hitchens’s quote: “Being a writer is what I am, rather than what I do.” Besides crypto, blockchain and fintech, international politics and economics are two other sources of inspiration.

Image Credits: Shutterstock, Pixabay, Wiki Commons

Disclaimer: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.

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