Ark Invest founder and CEO Cathie Wood defended bitcoin’s role as an inflation hedge during a Wednesday panel discussion alongside Jack Dorsey and Elon Musk.
The fund manager said bitcoin will serve as a hedge against inflation in certain situations, citing emerging markets as an example.
“There are a lot of emerging markets that are suffering from significant inflation-in other words, the purchasing power of those populations is going down. So they are going to migrate to bitcoin and other ways to preserve purchasing power,” Wood said.
She made the remarks when asked what advice she would give for institutions looking to put bitcoin on their balance sheets. Wood added that being able to sell to people who have migrated to bitcoin in inflationary situations would be “very useful” for corporations.
Earlier in the panel, Wood discussed how bitcoin’s fixed supply of 21 million tokens helps it’s role in preserving purchasing power.
Inflation concerns were stoked on Tuesday when consumer prices between May and June saw their largest one-month increase in 13 years, but bitcoin, often touted as a hedge against a weaker dollar, failed to respond in kind.
US stocks dipped at the open, while bitcoin was flat and then steadily dropped over the course of the morning and early afternoon. The price of the world’s largest cryptocurrency by market capitalization was lower by about 2%, below $33,000 for most of the day following the announcement of the CPI figures.
The asset was trading at $32,854 as of 1:10 p.m. ET Tuesday.
This has happened with past readings, as well. In May, bitcoin fell 7% on a day when CPI data showed prices rising at their fastest rate since 2008. Theoretically, with higher inflation, demand for assets that can serve as alternative stores of values to cash would rise – bitcoin among them.
“Bitcoin isn’t behaving like an inflation hedge anymore and will continue to remain heavy over expectations over higher yields,” Ed Moya, senior equity analyst at foreign exchange firm Oanda, said in a Tuesday note.
That inflation is viewed as transitory, however, could be a reason why the June report wasn’t enough of a catalyst to break bitcoin’s sideways trading, Moya added.
Bitcoin has long been heralded as a hedge against inflation mainly due to its finite 21 million supply of coins. The idea is that bitcoin serves a similar purpose to gold in protecting against reckless fiscal policies that devalue fiat currencies.
Billionaire investor Mike Novogratz once said bitcoin’s value has increased because governments are printing money like “toilet paper.”
Some bitcoin bulls, however, maintain that the cryptocurrency will still prove its purpose one day.
“Bitcoin is still a hedge for inflation in the long run for most investors,” John Wu, president of Ava Labs, the team behind the altcoin avalanche, told Insider.
He continued: “However, given the amount of new investors in the space, there are investors that think of it as a risk asset and those incremental investors may be selling in the short term as a source of fund.”
But it seems that the digital asset is holding firm at its $30,000 support level the more it gets tested, Julius de Kempenaer, senior technical analyst at technical analysis platform StockCharts.com, told Insider.
“As a result, an eventual break below this level will become more and more meaningful,” he said. “If and when this happens, $20,000 is on the cards as the next level of support to watch.”
The ratio of gold’s price relative to bitcoin is up to the highest point since early February. One Bitcoin is now equivalent to about 23 ounces of gold bullion, down from a record of 36 ounces in April, according to Bloomberg data.
It’s likely that many investors may be buying gold as an alternative to a weakening dollar. The Federal Reserve has promised to keep interest rates near zero for the foreseeable future, which could weaken the US currency and strengthen the case for gold.
Gold has also been historically viewed as a hedge against inflation, and Wall Street has grown increasingly concerned that inflation will overheat as the US emerges out of the pandemic.
Cryptocurrency bulls argue that bitcoin’s fixed supply makes it an even better hedge against inflation than Gold, but recent price movements in both assets question this narrative.
Last week, when key inflation data came in significantly higher than expected, bitcoin fell 7% in one day, moving in the exact opposite direction as one would expect an inflation hedge to move. Bitcoin experts say they’re not concerned about day-to-day movements in the historically volatile cryptocurrency’s price.
Fears of rising inflation came to a head on Wednesday when key data came in significantly higher than economists expected. Bitcoin, touted by some of its biggest supporters as an inflation hedge – because it has a finite supply, unlike the dollar – didn’t rise in response. It instead slumped around 7% on the day.
Headline inflation data as measured by the Consumer Price Index rose 4.2% year-over-year in April, the fastest rate since 2008, while core inflation rose 0.9% in the largest monthly increase for the core index since 1982. The Dow shed nearly 700 points Wednesday.
Meanwhile, alleged inflation hedge bitcoin dropped below $50,000 to its lowest level in nearly three weeks.
The day that inflation fears hit a boiling point would have been bitcoin’s time to shine as the hedge against devalued, government-backed money its supporters claim it to be. With its fixed supply of 21 million bitcoin, the cryptocurrency is meant to protect against reckless central bank policy and helicopter money distributed by governments during the pandemic.
But as inflation concerns built in the weeks leading to Wednesday’s crescendo, bitcoin was unable to break out past new records. It has slumped 24% in the last month, and Elon Musk’s tweet about its environmental impact following the inflation print didn’t help.
The world’s most popular cryptocurrency may not be the hedge it is claimed to be, and its sensitivities to everything from local restrictions on bitcoin mining to Elon Musk’s latest tweets show that the coin is really treated by market participants as a risk asset and a vehicle for speculation.
Still, some bull are steadfast that bitcoin will get its day in the sun as inflation rises.
Dan Held, head of growth at cryptocurrency exchange Kraken, doesn’t think bitcoin’s recent price movements indicate it’s not a good inflation hedge, and said it’s developed a floor at the current price of $45,000-$50,000.
“I don’t think there was one singular catalyst that would either have pushed bitcoin up or down that’s inflation related,” he told Insider. “Bitcoin moved so intensely upwards earlier this year, this was sort of a bitcoin catching its breath before another big leg up.”
Held said bitcoin is still undervalued as an inflation hedge, especially considering that at a $1 trillion market capitalization, its much smaller than other assets that are traditionally seen as inflation hedges like gold and real estate.