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Is It Time To Revisit Holding Cryptocurrencies?

At the time of writing, Bitcoin was nearing a new high of $20,000 per Bitcoin. What has changed since this peak was last reached?

By Bhagirath RoyPublished about a year ago 6 min read
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Is It Time To Revisit Holding Cryptocurrencies?
Photo by Traxer on Unsplash

Cryptocurrency Prices Plunge Again This Weekend, Bitcoin fell to its lowest price since December 2020. The drop comes after a similar price move just over a month ago. (See original story below)

Bitcoin's price has fallen to around $1 in the past 24 hours after a weekend in which the cryptocurrency market lost more than $200 billion and U.S. crypto lender Celsius Network shut everything down. It fell by less than 9% to $20,500 or INR 16,00,530. Payment.

Ethereum (ETH) is also down about 11% to around $1000 on the closing day compared to around $1400 on Friday. Cardano (ADA) suffered a similar fate, dropping around 11.50% today to $0.453698. It is down more than 25% over the last week.

The cryptocurrency market is crashing, or at least undergoing a major correction, this week as Bitcoin (BTC) fell below $33,000 for the first time in about 12 months, while Ethereum (ETH) and Cardano (ADA) also fell. And it seems.

Given the old adage about investing, ''buy a dip'', investors are now in a volatile crypto market, hoping this represents a temporary recession rather than a long-term bear market. You may be looking for a department.

If now seems like the time to buy, read on for historical trends, expert opinions, and buying tips for those new to cryptocurrencies.

Highlights

Analyzes the relationship between cryptocurrencies and future inflation expectations.

Positive connections are identified using the wavelet timescale method.

This relationship is limited to the time period consistent with the COVID-19 outbreak.

Otherwise, no clear evidence of crypto-based inflation hedging can be found.

Such results undermine the validity of important features proposed by cryptocurrency advocates.

Summary

This letter reviews the time-series relationship between cryptocurrency prices and future inflation expectations. Using wavelet timescale techniques, positive associations between cryptocurrency and futures inflation rates were identified, focusing on the short time period around the outbreak of the COVID-19 pandemic. This coincides with a rapid and synchronous decline in cryptocurrency prices and inflation expectations, which have since recovered rapidly to pre-crisis levels. Outside of crisis periods, we have found no clear evidence of the ability of Bitcoin and Ethereum to hedge against inflation during periods of high inflation expectations.

In the wake of the COVID-19 crisis, many countries have turned to aggressive fiscal and monetary stimulus to support their economies

In addition to supply shortages in key sectors, the situation has led to rising inflation expectations, exacerbated by stagnating and declining wages due to significant changes in international working conditions related to the pandemic. These expectations were highly volatile given the uncertainty surrounding the increase in the money supply due to unconventional monetary policy conduct. Investors are looking for a safe haven to diversify and protect from the effects of inflation on their purchasing power. This paper uses a dynamic framework to revisit the potential of cryptocurrencies as a viable diversification mechanism. The continued expansion of unconventional monetary policy appears to coincide with a simultaneous and widespread rise in asset prices, including cryptocurrencies. Rising inflation expectations are associated with rising cryptocurrency prices (Beau et al., 2021). Quantitative easing, the use of zero and negative interest rate policies, and continued signals of government support appear to support inflation expectations. This raises a currently unresolved research question, whether cryptocurrencies can serve as an inflation hedging mechanism. While gold was a popular inflation hedge in earlier times when realized inflation was high, Bitcoin is said to have many similar properties and is often referred to as “digital gold” in the media. This study is intended to complement the analysis of Beau et al. (2021) uses wavelet timescale analysis to find a dynamic relationship between expected inflation expectations and cryptocurrencies, especially Bitcoin and Ethereum.

In designing an ideal global digital currency, Balers and McDonald (2021) propose price stability, or pegging of the currency to inflation indicators, as a key feature. In practice, the major cryptocurrencies investigated in this study, Bitcoin and Ethereum, do not seem to meet the standards expected for inflation hedging. Cryptocurrency prices have high associated volatility (Shen et al., 2020) and are exposed to similar macroeconomic factors as traditional assets, making them less effective as hedging instruments (Colon and McGee, 2020; Colon et al., 2020). Retains some currency hedging ability (Urquhart and Zhang, 2019). The ease of trading and storing cryptocurrencies can be identified as one of the main reasons why they can act as a more efficient hedge against inflation than gold. In the case of Bitcoin, technical supply limits can also underpin its ability to provide a store of value. This technological frontier is not shared with Ethereum, which has undefined spending limits.

Expected future earnings growth in equities provides an excellent hedge against expected inflation (Bodies, 1982). Other assets, such as commodities, on the other hand, are based on supply and demand dynamics and offer strong hedging effects (Zaremba et al., 2019). Also, influenced by supply and demand factors, cryptocurrencies draw price-related information from multiple, less opaque sources, many of which are unrelated to expected inflation, and that aggregate demand will drive aggregate supply. Provides diversification benefits when outnumbered (Urquhart, 2018). Another consideration for Bitcoin and Ethereum is the ongoing issue of energy consumption (Cornet et al., 2021).

Covid Crazy

The COVID-19 situation has changed the way people act. Technology is being pushed to the forefront of everyday life. Things that were previously done physically, such as school, dining out, entertainment, work, and the purchase of many goods and services, are being moved to the virtual world. A natural fit for this type of agenda is the use of cryptocurrencies. Why? They are extensions of the technology-driven world

It can also be used to compete with the existing financial system at potentially lower costs.

Accepted

When Bitcoin last hit a record high, many financial institutions demonized cryptocurrencies as a means of payment used by criminals for terrorism, money laundering and the sale of illegal drugs. . Mastercard and Visa now link their cryptocurrencies to their credit cards, and PayPal can now use Bitcoin on its platform. Many governments are discussing issuing virtual currency versions of traditional currencies. He also worked with major banks and other institutions to encourage Facebook to launch a cryptocurrency called Libra. Cryptocurrencies are no longer for criminals, unless the aforementioned institutions commit crimes.

Adoption

The key to technology is diffusion or mass adoption. The more people use something, the more demand it has and the more important it becomes. With the spread, the system linked to the product is also beginning to change. Look at Apple iPods, Microsoft Windows, Internet service providers, and electric cars as examples. New demand will spawn new industries and piggybacked products that would not have been of much use without the introduction of the original product.

Vulnerabilities in Traditional Assets

The COVID-19 scenario and unfolding recession will decouple the underlying economies from the performance of these markets, making investments in stocks and bonds very expensive, and It carries a higher risk. High levels of debt make real estate investments riskier than they used to be, as are volatility in rental income and people's ability to pay their mortgages. Cash is a safe haven, but rising debt and the prospect of inflation mean cash is also at risk. The concept of diversification means we have to hold on to some of these investments, but there is now a yearning for assets that complement these offerings.

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