Why Is Bitcoin Failing as a Hedge During Crisis?
Cryptocurrencies are volatile. Bitcoin is volatile. It’s no surprise to anyone, and yet seeing it fall from $10,400 in mid-February to around $6,600 today is scary. One of the main “selling features” of BTC was that it could be used as a hedge against the turmoil of the global economy. However, now, that world is rapidly heading into a major crisis, crypto failed to live up to this expectation. In fact, it did so spectacularly, taking the fortunes of many investors for the ride. There is no doubt that this will only help that global crisis along.
But what does this mean for the future of cryptocurrency?
Using Bitcoin as a Hedge: Was It the Right Choice?
Millions of BTC holders are alarmed by the recent plunge in its value. Admittedly, this investment didn’t work out for them. From this point of view, one can say that right now, investing in crypto seems like a mistake.
However, this isn’t the first time that bitcoin went through a downfall in value. It always seems to climb back up eventually though. Of course, it hasn’t made it back to its peak values of 2017-2018, but it got up high enough to offer some hope to investors.
What this means is that bitcoin is volatile. And as the recent situation shows, it’s even extremely volatile and utterly unpredictable. By all means, BTC had to strengthen in response to critical conditions. It has shown this tendency before.
But this time it managed to surprise even experts, and it wasn’t a good surprise.
The conclusion is that bitcoin isn’t necessarily a bad hedge. But it’s so unpredictably volatile that you can’t really pin all your fortune on it. Therefore, while adding crypto to diversify your hedging portfolio is smart, it’s even smarter to use traditional assets. Stock hedging and currency hedging should provide you with financial security for the most part. It will be much safer to use crypto specifically to benefit from its volatility, instead of holding it.
Unfortunately, it’s understanding this particular fact that is one of the main reasons why crypto has failed to become a reliable hedge.
Why Did Bitcoin Fail to Provide Security in the Time of Crisis?
Bitcoin failed the trial of oil prices drop and the trial of coronavirus. Those weren’t the only two factors that affected it so greatly. But they were the ones that showed how unreliable crypto is when used as a hedge. And all that happened because not everyone wishes to use it this way.
The biggest problem that prevents cryptocurrency from taking a place near the fiat money is that it’s more frequently used for speculation purposes and short term profits, rather than as a payment method or regular savings product. It’s also not used as a legitimate hedge.
Put like that, it’s obvious why crypto volatility is so great. Its users encourage it, even if they themselves suffer as a result.
A reasonable way to solve this problem is to exert more authority over cryptocurrency. This way, governments of the world would be able to push it into some sort of frame. It might become a replacement for fiat currencies or a reliable hedge. But the point is that it must be forced into some kind of role. However, as the legal status of crypto in most countries is non-existent, it’s impossible to do so.
Is There a Future for Crypto as a Hedge?
The decentralized and unregulated status of crypto is what makes it appealing for many. Sadly, it’s also the reason why it’s failing to succeed in a hedging role. And, as mentioned above, the main problem is extreme volatility.
As it stands today, Bitcoin, and any other crypto, has no chance to be a good hedge. However, the status of cryptocurrency is changing. Slowly, big banks are starting to acknowledge it. Even some of the more progressive governments are looking into launching some type of their own “digital money”.
This shows that there is hope for crypto yet. But in order for any big developments to happen, its legal status will have to evolve.
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