Ethereum: After all, this is not a big hedge against inflation


Cryptocurrencies are supposed to protect their holders from devaluing fiat money. This is one of the central items of the bull case Ethereum (CCC:ETH-USD), Bitcoin (CCC:BTC-USD) and other leading cryptocurrencies.

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In a way, crypto is supposed to be the precious metal of the 21st century. Gold and silver have long served as a defense against hyperinflation in human history. Be it ancient Rome or modern Venezuela and North Korea, gold has served as a reasonable hedge against declining currencies.

Bitcoin, with its assumption that only 21 million would ever be created, has the same deflationary ethos. Aren’t Bitcoin and Ethereum a safe haven from the storm in a world of reckless printing of human money? Despite a strong intellectual argument, the cryptocurrency has failed to meet its end of the bargain in recent months as inflation soared. Here’s why.

Most traders do not buy it to protect against inflation

If you’re reading social media or Discord groups about cryptocurrencies, it’s mostly about quick money trading. What will altcoin pump next. Which irreplaceable token project (NFT) will soon involve influencers. And so on. It’s all quick money splashing around looking for the next big score. And that’s clear, there’s nothing wrong with that. However, the mindset is such that you get rich quick; wealth creation in a newly emerging ecosystem.

In contrast, most buyers of gold and silver are institutions, pensions, central banks and other cold-blooded capital distributors. They measure their retention times in decades. For them, precious metals are a hedge against the worst in humanity.

If and when institutions buy Ethereum and other cryptocurrencies, it will be as a generational holding company designed for the long-term safe pooling of capital. However, so far cryptocurrencies have not proven stable enough to serve as a serious asset class for most central banks or large financial institutions.

Crypto is strongly associated with Growth and Meme Equitys

The U.S. posted 7 percent consumer price inflation (CPI) on Wednesday, one of the highest readings since the 1970s. In theory, cryptocurrencies would have to grow if they were a monetary asset like gold.

However, I would argue that it is much closer to speculative assets such as special purpose vehicles (SPACs), SaaS shares and meme names. It’s probably no coincidence that there are so many hard holders GameStop (NYSE:GME) in AMC (NYSE:AMC) are also large at Ethereum, Dogecoin (CCC:DOGE-USD) and NFT.

The same rebellious spirit applies to both groups of assets. People have AMC because they don’t believe in Wall Street or traditional brokerage and trading houses. They want to suppress companies like the Citadel. Cryptocurrency ownership is a sign of distrust in the U.S. dollar, the Federal Reserve and the government’s ability to run the economy.

Counter-investing is a good thing. But this is a different kind of finance than a direct macroeconomic game, as has been the traditional investment in gold and silver over the years.

The dirty secret of Crypto: surplus printing and creating units

It is true that major cryptocurrencies such as Bitcoin have a limited supply of units. There will always be only 21 million Bitcoins. Ethereum does not have a similar hard limit, although there is a strict limit on the amount of new Ether released in a given year. Over time, for example, by migrating to Ethereum 2.0, the rate of new coin creation may be further limited. It is coded in ETH that its inflation rate will be low.

So what’s the problem? Two things. First, it is not possible to limit the amount of competing new cryptocurrencies. In the last year, cryptocurrencies such as Solana (CCC:SOL-USD) in Shiba Inu (CCC:SHIB-USD) emerged from ambiguity and became the leading cryptocurrency after market capitalization. Some of these will last longer than others; Solana, for example, has a much more promising future than Shiba Inu.

Nonetheless, creating each new competitive token reduces the usability and value of older projects such as Bitcoin, Ethereum and Cardano (CCC:ADA-USD). As any economics textbook will tell you, when you create more supply, it creates a new balance at a lower cost. As long as the supply of new cryptocurrencies is virtually endless, consumers will find it difficult to trust the long-term value of existing tokens.

The second question is Tether and other so-called stable coins. These exist to allow retailers to redeem crypto games without having to transfer money to fiat currency. However, stable coins now seem to be used to support market prices. A few years ago, there were less than a billion Tethers. They exist now $ 78 billion worthy of Tether.

There is a lot of debate what exactly supports that $ 78 billion. In any case, it doesn’t seem to be about actual dollars. What happens if you have a poorly capitalized institution of questionable reputation that supports the value of your assets? Sounds a lot like fiat banking, right? Ironically, cryptocurrency investors have swapped the Federal Reserve for Tether supporters. This is not necessarily a good trade.

ETH ruling

Over the last six months, it has become increasingly clear that cryptocurrency is another growth advantage. In most cases, it acts as shares of FAANG, software companies or other growth ventures. If the total flow of capital going into growth funds increases, Ethereum and other leading currencies should rise. However, if the decline in vehicle growth continues, ETH will continue to fall.

This is contrary to expectations that cryptocurrencies are expected to operate as correlated with inflation. However, cryptocurrencies are simply not hedging against inflation as they currently work. Its traders buy it for quick profits, not as a means of preserving wealth. The crypto-ecosystem is also full of its own inflation, both in creating a new unit and in stable coins.

The fact that investment operations often bring 10% annually into cryptocurrencies speaks volumes about the huge levels of inherent inflation and volatility in Ethereum and other leading cryptoecosystems. This does not necessarily mean that crypto is a bad investment. But please don’t buy it with the thought that it will protect against rising consumer prices. Trading Ethereum is a bet on something completely different.

At the date of publication, Ian Bezek did not hold (directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author and are the subject of Guidelines for publication.

Ian Bezek has written more than 1000 articles for and Seeking Alpha. He also worked as a junior analyst for Kerrisdale Capital, a large hedge fund based in New York City. You can reach him on Twitter at @irbezek.


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