Can we please throw out the idea that Bitcoin is an asset that protects against inflation?

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by cbus20122

Throughout the lifecycle of bitcoin, I’ve heard this statement over and over again. “Bitcoin is gold for the 21st century”… “Bitcoin is protection against jpow’s printer”…. “Bitcoin prevents against USD debasement”…

I have nothing against blockchain tech on its own. I think there are some wonderful aspects to the technology. With that said, the amount of narratives used to sell bitcoin to others that are just completely wrong on a variety of levels is getting to be rather stupid. And given today’s selloff, it’s a good opportunity to explain how the narrative is completely disconnected from reality.

Bitcoin As Inflation Protection = Bad Narrative

I have said for a long time that bitcoin is a RISK ASSET. It’s yet another in a long line of strong performing financial assets that have done well in our environment of excess liquidity and low inflation. In this light, it’s not that different from the growth investing asset class.

If bitcoin actually served as any form of inflation protection, then why in the world did it tank 12% on the day that we got the highest YOY CPI print in over a decade? And nobody can argue that it was a product of interest rates rising… since they haven’t risen in any significant way since that inflation print. And it’s now tanked almost 40% at a time when you would expect any idea of inflation protection to be the strongest driver of the asset class. Something… doesn’t add up here.

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Why make up incorrect beliefs to justify purchasing something, when there are perfectly reasonable bull cases to be made that aren’t dependent on misleading people on the economics of inflation and “money printing”? And for whatever it’s worth, Gold suffers from some of the same problems, although it obviously behaves a bit differently than crypto.

Bad Economic Narratives Dominate Bitcoin Beliefs

  • How many times do people need to show you M2 charts before they actually take a minute and compare M2 to the actual inflation levels? Hint for those who aren’t aware, growth in M2 is 100% meaningless if it causes an equivalent drop in the velocity of money.
  • How many times do people need to call quantitative easing “money printing”, without understanding how quantitative easing actually works? Hint: the “money printing” comes from temporary fiscal stimulus, not from the fed pushing reserves that are never used onto banks’ balance sheets.
  • How many times do people misunderstand that “asset inflation” (which is just another word for a bubble) is different than consumer price inflation? Hint: Real consumer price inflation is typically rather negative for more speculative risk assets (such as bitcoin).
  • How many times do people need to suggest the US dollar is “getting killed” before they actually look at a price history chart of the US Dollar? Hint: the US dollar is more or less right in the middle of it’s price range over the last 50+ years, is significantly higher than it was throughout the entire time period from 2005-2015, and hasn’t even dropped that far this year despite the massive amount of stimulus + fed swap lines used since the Covid pandemic. You would think that if the US dollar was actually debasing, we would get more than a 5% drawdown during the largest stimulus package ever.
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My personal subjective opinion is that Bitcoin is yet another risk asset that benefits largely from too much money chasing too few assets. This IS actually in part a product of quantitative easing, but the irony here is that QE is not actually causing inflation. I think blockchain will likely be used in the future for a wide variety of uses, but I have no clue whether Bitcoin will serve any actual functions aside from speculative ownership. Note: I do not own any crypto or crypto-oriented stocks, so I don’t have anything to either gain or lose here.

And by the way, this is not intended as a bullish or bearish post on bitcoin. Just trying to debunk some of the very obviously incorrect narratives that have been sold to the public over the years.

 

 

Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.

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