Should you count on bitcoin as a defensive asset?

Should you count on bitcoin as a defensive asset?

The cryptocurrency market continues to grow after the Fed meeting, which took place on March 16. On the evening of March 28, the bitcoin rate updated the 2022 high above $48 thousand, and the price of Ethereum peaked above $3.4 thousand for the first time since January 6.

If we analyze the latest statements by Fed Chairman Jerome Powell, we can say that the Fed will not stop implementing the chosen monetary policy: maintaining low interest rates for the coming years and powerful monetary stimulus, said Ivan Petukhovsky, co-founder of the EXMO crypto exchange. These measures are explained by the fight against the consequences of the crisis caused by the effect of the coronavirus. A similar trend is present in other leading global central banks.

 “It doesn’t look so irrational that the strategy of accumulating bitcoins by large hedge funds in order to minimize the negative impact of such monetary policy, as well as bring profitability to their clients”

He explained that there is a certain pattern between the growth of the balance sheets of the world’s leading central banks and the value of bitcoin. At the same time, in the first half of March, Raphael Schulze-Kraft, co-founder of the analytical company Glassnode, said that bitcoin inflation fell to 1.7% and continues to decline according to the programmed dynamics.

At the same time, according to data from the US Department of Labor on March 10, the consumer price index in the country reached 7.9% – a record high over the past 40 years. The opinion that bitcoin is a defensive asset is indeed not unfounded, Petukhovsky believes. He explained that bitcoin has the key qualities of a defensive asset – a stable value, largely due to the scarcity of emission, the ability to be exchanged for goods or services and, of course, growth potential. However, some restrictions are imposed on the cryptocurrency by a controversial legal status, the specialist added.

If we consider investment periods of 4 years, then there is a high probability of not only protecting against inflation, but also earning much higher than hedge funds or market indices, but still Bitcoin cannot be considered a protective asset due to its high volatility, senior analyst warned . In his opinion, the historical profitability of the first cryptocurrency is impressive, but he continues to remain in the risky asset class. The expert explained that the cryptocurrency market is quite young and cyclical – approximately every two years, the market trend changes, after growth, a serious drop of 50–80% usually follows.

“Under such conditions, the asset cannot be considered protective – for such a class of assets, only a minimal correction is acceptable against the backdrop of a rapidly developing economy, the value of assets should remain relatively stable” According to him, the situation is aggravated by the fact that at the end of 2021, the cycles of the crypto market coincided with the cycles of the traditional financial market. With the rise in global inflation, the price of bitcoin has also fallen by almost 50% in a very short period of time from the maximum of $69,000 set in November last year.

The expert added that one of the most serious risks before using bitcoin as a hedge against inflation is the lack of fundamental factors to assess the real cost of the asset. The price of bitcoin is determined only at exchange trading due to the balance of supply and demand, and there are simply no obvious economic circumstances for predicting global behavior, the expert concluded.

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