Cryptocurrency – Delayed Realization & The Stage Of Confusion

I Thought Bitcoin Was A Hedge Against Inflation?

This has been brought up numerous times throughout the mainstream media, as well as the Crypto media. People are disappointed, confused, and perhaps disillusioned. It seems people don’t really understand that “beating inflation” is measured over time. Gold once fell into this category. However, I don’t believe it qualifies any longer.

An asset that can be down over a 10-year period against the dollar cannot be a hedge against inflation. For starters, it has lost value against the dollar, not even factoring in the inflation over the prescribed time period. This means that the “store of value” dynamic has been lost. People that are unable to see this, concern me, as it is quite clear.

How Gold Once Performed

During the time that gold still operated as a store of value and inflation hedge, it would still be volatile to some extent in the short to medium term. In other words, if you measured it over a six-month period, or even a year, it was often not beating inflation. However, expand your time horizon and you begin to notice that value is being preserved. The same applies to Bitcoin. Short-term movements are noise.

So, if you bought a suit for an ounce of gold in 1999, theoretically, you should be able to buy the same suit in 2005 for an ounce of gold. What does this mean? It means that the asset has beaten the dynamic of inflation because the equivalent weighting can still purchase the same suit 16 years later. If you were holding dollars, you could perhaps be able to buy a nice tie. This is how an inflation hedge operates.

If you are trying to beat inflation over a 2 month period by holding Bitcoin, you are somewhat confused as to how an inflationary hedge operates. You may however strike it lucky in the short term by buying at the right time. However, don’t confuse that as Bitcoin acting as a hedge against inflation.

A Similar Issue

We have another similar misunderstanding taking place when it comes to Bitcoin’s correlation with the stock market. The correlation is in terms of direction, that’s all. It is not a case of “perfect correlation”. People somehow think Bitcoin cannot perform because it is “correlated”. The correlation is merely directional and not in terms of velocity. In other words, they are bound to travel in the same direction but not the same distance.

This can be clearly seen when comparing the price performance of any market index against Bitcoin from the 2020 low. In the chart below you will be able to see that the S&P rallied from approximately 2100 all the way up to 4800, which is a return of approximately 130%, measured to the peak.

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Let’s now shift our focus to Bitcoin. Once again, in the chart below, we are able to see that both the S&P and Bitcoin appear to be moving in tandem in terms of direction. The velocity however is a different story. Bitcoin rallied from approximately $3800 to approximately $69K! That’s a return of 1700%, compared to the S&P’s 130%. 

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This is why it is so very important to wait for a bottom in traditional markets. Essentially, Bitcoin could rally, provided traditional markets stop falling. This is a good example of how the correlation is not as “rigid” as is perceived. What I would expect to see is, once a bottom is definitively in, accelerated appreciation in the Crypto sector, relative to the broader market. The market and public are currently still in a state of misappropriated disappointment, due to a lack of understanding.

You can be sure that traditional market investors will be throwing money at Crypto once the trend pivots. Unlike the retail sector, they understand what is going on. They are the first ones out because they understand the “velocity dynamic”. Subsequently, they are also the first ones in, once they are convinced that the bottom is in.

Some readers are likely to have interpreted my analysis over the past six months or so as being purely bearish. However, there are numerous “understandings” that are helping me to formulate an accurate interpretation. As soon as certain dynamics shift, and I am not talking about an isolated model or indicator, I will most likely appear to be too bullish, LOL. This is how it seems to go.

However, for now, I am still waiting. Thanks for visiting! See you later!

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