Reverse inflation hedge

As inflation in the US began to take off last year, many economists predicted that it would be the beginning of the end for the US dollar, while traditional inflation hedges such as gold and real estate, along with the newer crypto assets of Bitcoin and Ether, would act as a hedge during troubled times.

Almost a year later, the only asset that has de facto served as a hedge has been the US dollar, which in 2022 has risen almost 15 percent so far, compared to early favorites Bitcoin and Ethereum, which have fallen 57 and 58 percent so far, respectively, and gold, which after a positive start to the year now trading around 6 percent down.

The first months' protection against inflation has thus been completely backwards to what economic theory says, and to understand what is actually happening we need to look beyond high inflation figures and look out over the rest of the world.

It is not only the United States that is heading into an economic crisis, but the entire world. Interest rates are rising everywhere, albeit too slowly to catch up with rising consumer prices, and globally assets are being sold off to flock to what serves as a safe haven for others outside US borders - namely the dollar.

As long as the outlook for the global economy looks weak, the dollar will act as a relatively good hedge against other assets, especially if Powell continues to raise interest rates.

However, that doesn't mean it's too early to start allocating into alternative assets. In September, "The merge" takes place in Ethereum, which means that the blockchain goes from Proof of Work to Proof of Stake. The transition also means that Ether can become deflationary, depending on how much activity takes place on Ethereum, due to the Ethereum network upgrade EIP 1559 which was adopted and simply explained that parts of the fees that users pay validators to carry out their transactions are burned, thus leading to Ether becoming deflationary if enough transactions are carried out.

Ether, which is now trading almost 70 percent below its peak at the end of last year, may not be close to an absolute turnaround in the near term, but for those who believe in the long term that more and more of the financial services of the future will take place over the blockchain, it may be time to accumulate at the levels we see now.

However, Bitcoin's role as an inflation hedge is not fully calculated, in the same way that gold's role is not either. The function of an asset as an inflation hedge is not measured in days, months, quarters or even years, but over decades, and so far Bitcoin in its relatively short lifetime has managed to deliver more value than the US dollar, and gold in its multi-thousand-year history has maintained its value over time.