Bitcoin fans often praise the top crypto currency as a great hedge against inflation, the best refuge to keep our purchasing power intact in times of rapidly rising prices.
In late February, Elon Musk, who invested $1.5 billion of Tesla cash in Bitcoin in January, wrote on Twitter that “only a fool” would not look for alternatives to investing anywhere other than secure government bonds whose yields do not even exceed the projected rise in inflation.
Bitcoin, he argued, offers at least better protection. “Bitcoin is almost like a fiat currency,” Musk wrote. The key is the word “almost”.
Musk apparently suggests that although Bitcoin prices are fluctuating, crypto currency is more likely to retain its value than, for example, a 10-year government bond that yields at 1.35% yields about 0.8% less than expected inflation. His stance reflects the view of Bitcoin proponents that because only a fixed amount of currencies can ever be traded, its value can never be underestimated.
This is supposed to give Bitcoin an advantage over the dollar or the euro, currencies whose purchasing power may “shrink” as central banks flood the markets with liquidity in an attempt to contain interest rates.
If this is true, then how did inflation expectations reach a new high and Bitcoin fall?
On February 21, Bitcoin reached an all-time high of $58,000. At the time, it seemed that investors were turning to Bitcoin for security, fearing that prices would rise much faster in the next decade than they had expected a month or two ago.
As of January 1, the 10-year Breakeven or BEI inflation rate rose from 1.96% to 2.2%. But as soon as the BEI reached a two-year high, Bitcoin went its own way, falling 20% to $46,540 as of noon on February 23.
This sharp drop in price is another reminder that Bitcoin is moving at its own pace despite speculators’ ambitions. For a short time, Bitcoin and inflation went hand in hand. This was completely random – like a bet on Bitcoin.