Bitcoin Trades As An Inflation Hedge for the First Time Ever Due to Gold’s Disappointing Performance
The latest bout of volatility liquidated over $700 million and reset the funding rate, sending them into negative. Meanwhile, USD has surged to a 16-month high after inflation rose to its highest annual rate in 30 years.
Surpassing $69,000, Bitcoin hit a new all-time high on Wednesday as it traded as an inflation hedge.
“That was the first time ever BTC traded as an inflation hedge. Crypto natives have big pockets now and thus the ability to change narratives. Perception => Reality,” said trader and economist Alex Kruger.
The sharp move up that came after CPI data showed that US inflation rose to its highest annual rate in 30 years to 6.2% in October didn’t last for long, and Bitcoin soon dropped as low as $62,755.
As of writing, BTC/USD is trading at $64,790.
Inflation at 6.2% means that if we keep it steady for 10 years, your $100,000 will become $54,800 by then. Compounding is a powerful force. Satoshi is having 🍿 somewhere right now. #Bitcoin pic.twitter.com/THtshLF1Y0
— David Marcus (@davidmarcus) November 10, 2021
The same has been the case for Ether, which hit a new high at $4,870, dropped just under $4,500, and is sitting just under $4,700. During this round of volatility, the total crypto market cap surged past $3.1 trillion, only to fall under the $3 trillion market but is yet to climb back above it.
As a result of this volatility, 172,576 traders were liquidated in the past 24 hours for more than $700 million, with Binance accounting for 47.4% of it. However, the leading crypto exchange doesn’t provide complete numbers.
The funding rate on Bitcoin perpetual contracts is now, as a result, normalized, currently negative on OKEx and FTX while being the highest on Huobi at 0.0165%.
Earlier this week, the Crypto Fear and Greed Index, which jumped to a reading of 84, has gone down to 77, representing “extreme greed” still, up from “extreme fear” with a reading of 20 in late September.
“People are looking for places to put their money,” commented JJ Kinahan, chief market strategist at TD Ameritrade, on the move.
Currently, people need an asset to invest in that grows faster than the inflation rate, and crypto is among the very few that really outperform here.
USD & Gold Benefited, but Stocks Didn’t
This new high can clearly be explained through the fundamental argument gaining traction in recent months that Bitcoin is an inflation hedge. Unlike bitcoin, whose fixed supply can’t be inflated by a government or a central bank, the US dollar’s 40% of supply came into existence just in the last 12 months.
“Bitcoin continues to enjoy the rally that began in August and accelerated through September and October,” said Sui Chung, chief executive of CF Benchmarks. After Bitcoin futures ETF drove the cryptocurrency prices last month, this month, it “seems to now be fueled by the sustained inflation that we are witnessing across all the world's major economies.”
3/ There seems to be a melt-up across global markets with participants chasing topside on the back of positive earnings and in anticipation of global trade reopening. We expect this broad bullishness to perpetuate in the near-term.
— QCP Capital (@QCPCapital) November 11, 2021
The US consumer price index surged as much as 6.2% on an annual basis, with gasoline leading the increase. The number of Americans filing claims for unemployment benefits also fell to a 20-month low.
In reaction to inflation news, the stock market took a dive, in contrast to Bitcoin’s initial upwards move. The hot US inflation reading inflated the worries that it could renew pressure on policymakers to lift interest rates.
Gold was also the beneficiary of investors seeking inflation hedges as it jumped to a five-month high.
US Treasury yields also spiked higher. While yields on the benchmark 10-year note rose by the most since February, real yields that take inflation into account slid to record lows. The dollar index also hit a 16-month high as it surged above 95.
But Gold Not the Preferred Choice
While gold is also advancing, Christopher Wood, Global Head of Equity Strategy at Jefferies, has taken to Bitcoin as he added another five percentage point allocation to Bitcoin in addition to the existing 5% allocation he made last December.
This increase in Bitcoin’s allocation has been at the expense of gold, which is down 2.44% YTD compared to Bitcoin’s 125% uptrend.
But Wood isn’t giving up on precious metal yet either though he said in his weekly note to investors titled ‘Greed and Fear' that it is risky for aging gold bugs to ignore the reality of Bitcoin being a competitor to bullion as a store of value.
While Ether is not part of his pension fund portfolio as it is not a store of value, Wood said that ETH would likely continue to outperform bitcoin in the coming months. ETH is up 550% YTD.
The growing mainstream acceptance of crypto and the arrival of Bitcoin ETF in the US “means that it is timely to make a further adjustment to the global portfolio for US dollar-denominated pensions funds which was set up at the end of 3Q02 (third quarter of 2002) as a way of hedging the risk of the collapse of the US dollar paper standard,” said Wood in the note.
“In this respect, the performance of gold this year remains hugely disappointing given how negative rates are in America.”
6/ We could be entering a phase where BTC is caught in a positive feedback loop where both ‘risk-on’ and ‘risk-off’ headlines see significant price increases. Effectively, BTC is seen as both a macro risk asset and also an inflation hedge.
— QCP Capital (@QCPCapital) November 11, 2021
Besides disputing traditional finance, crypto and blockchain technology also has the “potential to trigger the end of the current dollar paper standard,” said Wood, as according to him, the USD paper standard has already been living on borrowed time ever since former US president Richard Nixon removed the gold backing.
“It is increasingly obvious that central bankers in the developed world are now in a trap of their own making in the sense that they have not been able to escape from unconventional policy in the 13 years since Ben Bernanke first adopted quantitative easing in late 2008.”
In the ETF World
The first Bitcoin Futures ETF's approval led Bitcoin to start its rally last month, marking the beginning of the bullish Q4, which is now continuing this month.
On Wednesday, both Bitcoin futures ETFs BITO and BTF had their biggest volume days in two weeks, noted Eric Balchunas, a Senior ETF Analyst at Bloomberg, adding that the options volume on BITO has also been massive, already seeing about half the options volume as GLD.
Amidst this, Bitwise Asset Management withdrew its application to list a Bitcoin futures ETF, a move made by Invesco as well, due to expensive roll costs as longer-dated typically trade at a premium to the spot price.
3/ Any ETF is a big step, so this was a real breakthrough … although of course, we knew there would be challenges.
For one, bitcoin futures have historically traded in contango. As a result, a rolling bitcoin futures ETF will generally underperform spot bitcoin.
— Matt Hougan (@Matt_Hougan) November 10, 2021
The company, however, did keep its filing for a physically-backed Bitcoin fund.
“Ultimately, what many investors want is a spot bitcoin ETF. We think that's possible,” wrote Matt Hougan, Chief Investment Officer at Bitwise on Twitter.
“So Bitwise will continue to pursue that goal, and we will look for other ways to help investors get access to the incredible opportunities in crypto.”