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Is Bitcoin going to be a hedge against sovereign assets?

Updated: Jan 23, 2023

Keep in mind that the bitcoin was created amidst the 2008 financial crisis as a non-sovereign asset that individuals can peacefully opt into with a portion of their capital.

As mentioned in Bitcoin’s whitepaper:

“A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution”

Its supply schedule is entirely predetermined and it continues to execute its code exactly as its rules outline. According to the current code, there will only ever be 21 million bitcoin and the current inflation rate of approximately 1.7% is set to continue to decline, regardless of any macroeconomic factors.

Therefore, bitcoin may soon contrast with the traditional economy fundamentals and fiat currencies – mainly the rate of increased money supply and central bank balance sheet expansion.

The United Kingdom is an insightful example of the current situation government and central bank find themselves in; wanting to revive economies and agonizing economic growth with fiscal tools, with a central bank that is tightening to try to fight decades-high inflation, but then encountering market stress that requires more liquidity to tamp down financial volatility and keep it from spreading.

Rishi Sunak has been chosen to be the country’s next UK Prime Minister following Liz Truss’ controversial exit from office as she was forced to resign after her economic stimulus plan quickly unraveled leading to political and economic instability.

But the economic problems that trouble the country aren’t likely to be cured quickly.

Some U.K. investors or traders may have already noticed bitcoin’s potential to opt out of the current situation as trading volumes between the British pound and bitcoin spiked to a record high. Trading volumes between bitcoin and the pound jumped 233% in September overall from the month before, according to data from CryptoCompare (notice that trading between the cryptocurrency and a similarly battered euro also jumped 68%)

British Pound Sterling 30-day volatility is almost as high as Bitcoin as the U.K. economy faces a tough month of uncertainty,

This market trend emerged as inflation hits living costs, gas prices soar, and the pound weakens

In bitcoin's infancy, a key selling point was its potential protection against currency depreciation and inflation. That narrative began to break down as greater institutional adoption meant cryptocurrencies traded more in lockstep with traditional risky corners of financial markets.

To summarize, the strengthening U.S. dollar is wreaking havoc among other countries and may put pressure on the Federal Reserve to soon reverse its tightening monetary actions, something that has precedent based on 1985’s Plaza Accord. Additionally, more monetary debasement may be needed to alleviate the high debt load among developed economies, while recent events in the United Kingdom have shown counterparty and liability risks in the system, making monetary intervention and doses of liquidity features that are not likely to go away any time soon.

Bitcoin is about to become the safe haven asset. Nowhere else to hide mentioned Barry Silbert . This is echoing Bank of America’ s digital strategists Alkesh Shah and Andrew Moss as they highlighted that in mid-August , Bitcoin has a 40-day correlation with gold of about 0.50, up from around zero. While the correlations are higher with the S&P 500, at 0.69, and Nasdaq 100 at 0.72, they’ve flattened out and are below record levels from a few months ago

Comparatively, bitcoin remains one of the few assets that does not correspond to another person’s liability, has no counterparty risk, and has a supply schedule that cannot be changed. Whether those properties begin to look more attractive is ultimately up to investors and the market to decide.

So are investors ready to bet on bitcoin as a hedge again?

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