Is Inflation Killing the Crypto Bull Run?

Is Inflation Killing the Crypto Bull Run?

 

Omicron is here, inflation is spiking and markets all over the world are struggling. Shouldn’t this be crypto’s moment?

When the WHO decided to name the latest coronavirus variant of concern, ‘Omicron’ (skipping ‘xi’, the actual next letter in the Greek alphabet), I wonder if they were like, “Oh yeah, this one sounds like a proper supervillain.”

We’re still waiting to hear whether or not Omicron is going to make like Orson Welles in the original Transformers movie (he, uh, voiced Unicron) and eat the planet whole. But the effect on already shaky markets has been marked. Bitcoin is down 30% off its recent highs and most alts have fared far worse. Stocks all over the world have been slipping, while even a traditional safe haven like gold is stagnant.

Meanwhile the US dollar is booming, as if it wasn’t experiencing generational rates of inflation on the back of printing 40% of the dollars that have ever existed in the last 18 months. Wasn’t Bitcoin supposed to be the antidote to all this? Why do things suddenly look so dicey?

Taking the plunge

You don’t have to look far for reasons to worry about the world economy: surging inflation; supply chain snarls; Chinese economic slowdown (AKA the Evergrande effect); halting COVID recoveries; perilous debt levels; and risk-on assets that have been improbably breaking records since 2009.

However the reasons for crypto’s plunge last Saturday were rather more proximate. Somebody unwound a large position (potentially because of the above), it depressed the price and set-off a good, ol’ fashioned liquidation cascade. Next thing you know the price has dropped US$10,000 in half an hour, flushing out more than US$5 billion in leverage and dropping crypto’s market cap by half-a-trillion. Ouch.

Good inflation, bad inflation

It’s undeniable that crypto has benefited enormously from the COVID era. As countries printed enormous sums of money to keep their economies running in the face of prolonged shutdown, Bitcoin’s role as a hedge against inflation came to the fore. And where Bitcoin went, crypto followed.

At the same time, crypto has also benefited enormously from rock-bottom interest rates (AKA cheap money) that have never recovered from the GFC. If holding money in the bank isn’t producing sufficient yields, it makes sense to put that money into riskier, higher yielding assets – and there ain’t nothing riskier or higher yielding than crypto.

However, if interest rates go up in response to persistent inflation and people are already perilously indebted (which they are), the broader appetite for risk may begin to ebb. And in a frothy, hype-driven market like crypto it doesn’t take much of a shift in sentiment to produce outsize effects.

Crypto grows up

While it sucks to see your portfolio suffer, we need to remember that this is kinda what we asked for. We always dreamed that crypto would one day be part of the financial establishment. We cheered on every company, hedge fund and nation state that bought into the story. Bitcoin became a trillion dollar asset; even after the crash, crypto as a whole is worth more than pretty much any other company on Earth.

And so here we are. Our idiosyncratic asset class is behaving like the things it was designed to replace. We keep saying ‘crypto is here to stay’. Well, responding to macroeconomic conditions may be the price of playing in the big leagues.

Still, it’s too early to say that Bitcoin has lost its inflation hedge status. It is, after all, up a shade under 300% over the last 12 months. Instead, perhaps it’s more a question of short- and long-term effects. In the short-term, Bitcoin is a risk-on asset that could suffer if investors flee to the relative safety of US dollars.

However, in the long-term – the 5,10, 20 year terms in which the fate of money plays out – it should keep doing what it’s been doing every day since 2009: offering the world an uncensorable, democratic alternative to the persistent devaluation of money. And maybe that’s still worth something.

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