Crypto a risky bet as a hedge against inflation

Keynote speaker, event host and moderator Susannah Streeter reports on the volatility of crypto currencies and why they may be a less attractive prospect than gold as a hedge against inflation.

Susannah Streeter, TV presenter, keynote speaker, event moderator, event host and MC

Given the volatility of both Bitcoin and Ethereum, the direction of travel in terms of price in 2022 is far from certain.

Crypto assets are highly sensitive to the fortunes of the stock market and have been propelled higher in this era of ultra cheap money.

As speculation swirls about just when central banks will start further tightening mass bond buying programmes and start raising interest rates, they are likely to continue to be highly volatile and we’ve seen steep falls in crypto assets amid expectations of a continued ramp upwards inflation and the likely tightening of monetary policy as a result.

Gold tends to do well in catastrophic times, as we saw during the early days of the pandemic, but the problem is it doesn’t pay any income. It can also volatile: between 2011 and 2015, the value of gold fell by around 40%. But in terms of volatility crypto currencies certainly have the edge, which make them an even less attractive prospect than gold as a hedge against inflation.

The recent falls may drive more crypto fans into the market in expectation of a steep recovery to come. There is a chance that if investors do pile in crypto could shoot up above it’s record high of just over $68 thousand and edge towards $70 thousand. But as we’ve seen with its rollercoaster ride so far, it’s unlikely to stay there for long.

But if there are fresh price spikes in 2021 it’s likely to are likely to concentrate minds further amongst central bankers and regulators as surges in crypto prices, often see more retail speculators entering the market hoping to catch a ride upwards. Regulators are worried about financially vulnerable consumers getting caught up out, if prices fall, especially as 14% are getting into debt to invest in crypto assets. With unregulated crypto assets growing 200% in 2021 alone from just under $800 billion to $2.3 trillion, and banks and hedge funds now becoming involved, the central banks are worried about contagion if the value of coins and tokens held deflates rapidly. The past few months have seen the firmest indications yet that that regulators will soon be stepping in to break up the crypto party although it’s still unclear what level of regulation will be imposed. This could go two ways in terms of price, greater regulation may give more legitimacy to some currencies, but a push of the industry towards stable coins, could unleash a fresh lack of confidence in the long term prospects for a raft of  highly speculative assets.

Regulators and central banks are walking a tricky tightrope, recognising the need to foster new decentralised payments technology but ensuring enough rules are in place to prevent runaway speculation infecting the wider financial sector. If the environment is made too cumbersome there is a risk that innovation in the fast moving world of decentralised finance could be quashed, slowing down the efficiency of operations and leaving the UK behind countries which are welcoming crypto with open arms.