Why bitcoin’s not the inflation hedge bulls think it is


As inflation concerns creep into financial experts’ conversations and prognostications, adventurous investors are eyeing bitcoin as a way to avoid the risks of weaker purchasing power. But according to a new report from Bank of America, those individuals would be better off looking elsewhere.

For bitcoin bulls, the fact that the supply of bitcoin is capped at 21 million means that the inflation risks typically arising from “money printing” don’t apply to the cryptocurrency. But according to Francisco Blanch, who authored the report, the past several years of data don’t support that.

“Broadly, we find that Bitcoin has not been particularly compelling as an inflation hedge as commodities and even equities provide better correlations to inflation,” he said. “As such, we think the main portfolio argument for holding Bitcoin is … sheer price appreciation, a factor that depends exclusively on Bitcoin demand outpacing supply on a forward basis.”

Another point against bitcoin, Blanch said, is the fact that just 2.4% of bitcoin-carrying accounts own 95% of all bitcoin in existence. That degree of concentration in just a few hands, he said, “makes this instrument impractical as a payments mechanism or even as an investment vehicle.”

Because of the high ownership concentration, the crypto asset is liable to experience sharp price swings from movements in such “whale” accounts. The degree of income inequality across bitcoin owners, he added, easily overshadows the inequality observed among countries plagued with the greatest income inequality.

Bitcoin also loses points, Blanch said, for its net negative societal impact. While the social benefits are mixed, with some using it for illicit activities while others living under repressive regimes harness it as a store of wealth, he asserted that the social negatives “outweigh” the positives.

The environmental impact of bitcoin has also increasingly come into question. According to Blanch, the “miners” producing bitcoin now has the same annual electricity consumption rate as Greece. Every $1 billion invested into bitcoin, he estimated, produces as much carbon dioxide per year as 1.2 million cars.

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