Bitcoin and Ethereum were potential inflation hedges, so what went wrong?

Bitcoin and Ethereum were potential inflation hedges, so what went wrong?

In 2022, Bitcoin
BTC
and Ethereum
ETH
Both have lost about two-thirds of their value during the year so far. This is at a time when the US inflation rate is around 8% and market risks are high. What happened to Bitcoin and Ethereum as a store of value?

Cryptocurrency volatility is not new

It is worth noting that this level of volatility is nothing new. For example, Bitcoin experienced a 60% drop in 2020, 2018, 2015, and 2014. Sharp increases in the value of cryptocurrencies often attract more attention, but we have seen similar sharp drops in value before. It may be hard to bear, but it’s not new.

What is different this time is the gradual decline over a period of months, although the price trends in 2015 were more or less similar. However, history indicates that the cryptocurrency has not performed well as a store of value in recent years, so 2022 is not a huge surprise.

digital gold?

Those who expect cryptocurrency to hold up in times of market stress often think of it as digital gold. Here it is important to remember that gold has not had an inspiring year either, currently down about 6% this year.

Yes, this is much better than Bitcoin and Ethereum, but many assets have lost money this year whether it is stocks, bonds or alternatives. So any asset performing well in 2022 was a challenge.

stronger dollar

The strong dollar did not help. With the strengthening of the dollar, most of the dollar-denominated assets weakened. For example, if you look at the price of bitcoin in euros, the drop is about 10% less than its price in dollars, consistent with the currency shifts we’ve seen this year.

To the extent that inflation has risen in the US, the dollar has held up and so has the US Federal Reserve raising interest rates faster than many countries, and the dollar has been seen as a safe haven currency compared to many other countries.

Adoption continues

At the same time, the widespread adoption of cryptocurrencies continues in the most popular financial system. It’s been a year since the US saw its first Bitcoin ETF, and Bitcoin could now be part of 401(k) plans this summer BlackRock has joined forces with Coinbase to offer cryptocurrency to institutional clients. So the acceptance of cryptocurrencies continues into the mainstream financial system, with accompanying regulation.

So, while cryptocurrencies may eventually become stores of value, Bitcoin and Ethereum for the time being are still behaving like risky assets. For example, NASDAQ
NDAQ
Technology stocks are down nearly 40% this year at the time of writing, and that’s not far from the poor performance of Bitcoin and Ethereum.

However, a sharp decline in value is not necessarily a reason to write off these assets. We’ve seen similar declines at least four times in the past decade, and if anything, cryptocurrencies are now more interested in the financial and investment system than before.

They also continue to offer a diversified revenue stream. For example, since June of this year sold stocks and bonds. At the same time, cryptocurrencies have been fairly stable, despite significant losses earlier in 2022.

Finally, of course, despite their massive presence throughout their existence, both cryptocurrencies have shown massive increases in value in the long run. 2022 may be disappointing, but it’s not a huge change in the history of the high volatility we’ve seen in crypto assets.

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