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Morgan Stanley: Bitcoin a Poor Hedge Against Inflation

Last Updated March 4, 2021 4:58 PM
Josiah Wilmoth
Last Updated March 4, 2021 4:58 PM

The stock market has wavered over the past week amid concerns that war will break out between the United States and North Korea. At the same time, the bitcoin price and total cryptocurrency market cap soared to record levels, leading some analysts to believe that investors are turning to cryptocurrency as an economic safe haven. Historically, gold, silver, and other precious metals have served this function, but younger investors are increasingly adopting bitcoin to hedge against economic instability and inflation.

But Tom Price, an equity strategist at Morgan Stanley, says bitcoin has still not proven itself to be a viable safe haven for investor assets. As reported  by The Australian, Price says that while bitcoin has advantages over gold as a medium of exchange–it is exponentially more divisible and portable, for instance–cryptocurrency is still too immature to serve as an inflation hedge. Even if bitcoin does prove successful over time, he warns that this success will inspire the development of even more competitor cryptocurrencies, preventing the bitcoin price from achieving stability.

Some claim that the protocol limiting bitcoin’s supply growth rate, underpins its value….But if bitcoin is successful long term, we should continue to see competitor cryptocurrencies and market strategies emerge to exploit the new economic rent — a bearish risk for bitcoin’s price.

Moreover, Price notes that bitcoin users rely on electricity and Internet access to engage with the network. Blockstream just launched a satellite network designed to allow bitcoin users to download a full node without access to the Internet, but even this solution would still require a power source. Gold, on the other hand, does not require a connection to the power grid.

There’s also the problem of trust. Blockchain Capital analyst Spencer Bogart says he believes that bitcoin is superior to bitcoin as both a medium of exchange and a store of value. However, bitcoin is a recent innovation, making it hard to achieve the level of trust gold has built throughout history:

[G]old has something very important that bitcoin lacks: a more than 1,000-year history of being a decent store of value. This is very important for trust and people’s willingness to store value in that particular asset.

That said, cryptocurrency adoption is proceeding rapidly, and the mainstream financial sector is taking note. Goldman Sachs recently acknowledged that it’s “getting harder” for them to ignore cryptocurrencies. Initial coin offering (ICO) investments have surpassed early VC funding for Internet companies in recent months, and bankers have begun abandoning mainstream finance to found ICO investment firms.

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