There is a financial joke, whose origin I do not know, that has been making the
rounds lately. It goes like this: If inflation continues at current rates, the
purchasing power of wealth held in dollars will be cut in half over the next
eight years. But cryptocurrencies can beat that: They can lose half their value
in just a few months.
اضافة اعلان
Ha-ha. But crypto
enthusiasts have indeed marketed their products as an inflation hedge.
Coinbase, the biggest US crypto exchange, declares that cryptocurrencies are
appealing because “they’re more resistant to inflation than fiat currencies
like the US dollar.” This is, not incidentally, the same argument people used
to make for holding gold.
But a funny thing
happened as fears of inflation grew: Bitcoin’s price in US dollars over the
past year dropped.
So why have crypto
prices crashed at exactly the moment inflation has taken off? To some extent it
may be a coincidence: If you believe, as I do, that crypto is to a large extent
a Ponzi scheme, this may just happen to be the moment when the scheme has run
out of new suckers.
But there is also
a more fundamental issue: People who touted cryptocurrencies as a hedge against
fiat-currency inflation — sort of a digital equivalent of gold — fundamentally
misunderstood how fiat currency systems work, and also, for what it’s worth,
misunderstand what has historically driven the price of gold. It was, in fact,
predictable that an upsurge in inflation would drive the price of Bitcoin down
— although maybe not that it would produce such an epic crash.
The key point to
understand is that while the dollar is indeed a fiat currency — that is,
authorities can issue more dollars at will, without the need to back those
additional dollars with some kind of collateral — America isn’t Venezuela or
the Weimar Republic, a nation that prints money to pay the government’s bills.
Our money supply is a policy tool used by the Federal Reserve to help keep
prices fairly stable — actually, rising around 2 percent a year — while
avoiding recessions. Sometimes the Fed gets it wrong, as it did over the past
year, when it (and I) failed to see the inflation surge coming. But when it
does, it tries to correct the mistake.
What this means,
in turn, is that an inflationary outbreak doesn’t presage a spiral of
ever-rising prices, which you can avoid by buying crypto. On the contrary,
markets believe that the Fed will do whatever it takes to bring inflation back
down to normal levels: The five-year, five-year forward inflation expectation
rate, a measure derived from spreads between regular US bonds and bonds indexed
to the Consumer Price Index, has barely moved through this whole episode.
Cryptocurrency is not a hedge against inflation, it’s the opposite: When inflation goes up, the Fed responds by raising interest rates, which makes cryptocurrencies go down.
And saying that
the Fed will do “whatever it takes” means that it will raise interest rates
until there are clear signs that inflation is cooling off. The Fed only has
direct control over short-term rates, but long-term rates have already soared
in anticipation of continued Fed tightening.
What does this
mean for crypto? Well, the rate of return investors can get by buying bonds is
up, which makes buying other assets, like stocks and, yes, cryptocurrency less
attractive. So cryptocurrency is not a hedge against inflation, it’s the
opposite: When inflation goes up, the Fed responds by raising interest rates,
which makes cryptocurrencies go down.
The thing is, we
should have learned all about this from what happened to gold after the 2008
financial crisis. Gold prices soared, which quite a few people saw as a
harbinger of runaway inflation.
But the expected
inflation never came. What was happening instead was that the Fed reacted to
persistent economic weakness by keeping interest rates low, and low returns on
bonds pushed people to invest in other things, including gold. Whatever purpose
holding gold serves — something that, to be honest, remains somewhat mysterious
— one thing gold definitely is not is an inflation hedge. And the same is true
for cryptocurrency.
So another crypto
myth bites the dust. And it’s hard to avoid wondering what myths are left.
Recently legendary
short-seller Jim Chanos gave Bloomberg a wide-ranging interview in which,
speaking of cryptocurrency, he pointed out that “a lot of the concepts behind
its adoption early on have proven to basically be, you know, not there or
wanting. You know, it was going to be a replacement currency. Well, no, it’s
not. Well, it’s going to be a diversifying asset. Well, no, it hasn’t been.”
And now we know it isn’t an inflation hedge either.
Chanos went on to
call crypto a “predatory junkyard.” Well, I wouldn’t go that far. Actually, on
second thought, I would.
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