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No Longer Digital Gold? Bitcoin as a Defense Against Inflation

How has investors’ attitude towards Bitcoin changed over the past year? Will its price fluctuations decrease in the future? Read in our LATOKEN review!

Inflation has become one of the main topics in 2021. Against the monetary policy backdrop, national currencies are depreciating, and risky assets are showing significant growth. One of the assets that has demonstrated positive dynamics in the last year is Bitcoin. Despite the current correction, its price has risen by 62% over 12 months, to current levels of about $48,000, while in November, the coin set a historical maximum of $69,000.

A year ago, Bitcoin was often compared to gold, and parallels were also drawn between these assets. However, in 2021, such comparisons became rare due to the high volatility of the first cryptocurrency. For example, in May, the Bitcoin exchange rate fell by more than 30% per day, and in December, it fell by more than 20%.

Is Bitcoin a defensive asset?

Bitcoin can be called a fundamentally new asset class. But with such volatility, how can the first cryptocurrency be called a means of preserving capital? However, it might be possible that fluctuations in asset prices will decrease over time.

Bitcoin has been dubbed “digital gold” as a sign of its ability to act as a “safe harbor” during a crisis, turbulent times in the stock market. Previously, such havens were traditionally considered gold, treasury securities (we mean the United States and other advanced economies), hard currencies. In part, Bitcoin can indeed protect an investor from the risks of asset depreciation, but cryptocurrency still cannot be considered a full-fledged analog of gold.

Volatility still cannot allow Bitcoin to be included in the list of defensive assets. However, over time, cryptocurrency will likely be able to become such since it combines the features of both gold (its reserves are limited in the world) and hard currencies, which are in full control of the owner. In a sense, Bitcoin can be compared to ancient gold coins.

Cryptocurrency vs. inflation

Historically, over the 12 years of Bitcoin’s existence, it has not only acted as a hedge against inflation it has also overtaken all stocks from the S&P500 index. Bitcoin is designed to protect against inflation. We can say that the cryptocurrency was designed so as not to become a victim of inflation, which means it can be used as a protection against high inflationary risks.

The market is still far from massive, so, probably, with the arrival of large investors, the cryptocurrency price will level out and become less volatile. However, nothing is known so far, and this process may take years.

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LATOKEN crypto exchange does not provide any investment, tax, legal, or accounting advice. This article is written for informational purposes only. Like other assets, cryptocurrency is subject to market risk. Please do your own research and trade with caution.