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Sunday, June 26, 2022

Opinion: Snap out of it already! Cryptocurrencies like bitcoin are not hedges against inflation

Pity the fools who still believe that bitcoin and other cryptocurrencies will prove to be trusty hedges against inflation.

Sadly, those people are still out there, clinging to vain hope, despite all evidence to the contrary. Various digital currencies have been spiralling downward as inflation rates in many countries hit highs not seen in decades.

That divergence ought to dispel the delusion, peddled by many crypto apostles, that investing in these highly speculative assets will protect, and possibly enhance, the purchasing power of ordinary people.

But it won’t.

Digital devotion is now dogma for many retail investors, which is why global regulators must take co-ordinated action to protect these deceived disciples from themselves.

Meme investing, including in crypto, is the epitome of groupthink. But the temptation is understandable because times are tough for ordinary people.

Interest rates are rising, gas prices are soaring and it is costing us more to put food on the table. That’s why so many folks are still willing to gamble what’s left of their hard-earned money on these speculative assets.

It doesn’t help that they’ve been egged on by the likes of Tesla CEO Elon Musk and Ottawa-area MP Pierre Poilievre. The Conservative leadership candidate has claimed, among other things, that cryptocurrencies such as bitcoin offer Canadians a chance to “opt out” of inflation.

Such assertions about bitcoin, in particular, are rooted in the notion that its supply is capped at 21 million, suggesting its scarcity will safeguard its value.

To her credit, the Bank of Canada’s senior deputy governor, Carolyn Rogers, has debunked Mr. Poilievre’s “opt out” of inflation myth by stressing that cryptocurrencies are not a stable source of value.

But we’re living in the age of anti-intellectualism. There’s no guarantee that people will accept such reasoned logic when crypto promoters have attacked the credibility of our central bankers and offered the masses a more seductive solution to their inflation woes.

Regulators have their work cut out for them, especially when it comes to investor education.

A report released Thursday by technology company Block suggests that 27 per cent of higher-income people would bitcoin as “protection against inflation.” It seems 17 per cent of lower-income people share that view.

Recent research published by the Bank of Canada, meanwhile, found that roughly 5 per cent of Canadians owned bitcoin between 2018 and 2020. What’s more, that ownership was “concentrated among young, educated men with high household income and low financial literacy.”

Ouch! But sounds about right.

It boggles the mind that anyone still believes it is appropriate to suggest that bitcoin and other cryptocurrencies ought to compete with gold as safe-haven investments. Not only is gold something that you can actually hold in your hands, it has wide acceptance as an alternative asset.

China and India are among the world’s biggest gold consumers precisely because it could be used as a medium of exchange. Why do you think Asian parents, including my own, are so fixated on giving gold as wedding gifts?

Moreover, “as a finished tangible product, gold exists even if new gold does not get mined. Bitcoin’s existence depends on the support of bitcoin miners and on the existence of computer networks and electricity,” according to RBC Wealth Management.

Although some industry promoters also claim that cryptocurrencies are the solution to the world’s income inequality problem, nothing could be further from the truth. Bitcoin’s recent price declines appear to be tied to the waning fortunes of tech stocks, according to analysts.

Even TerraUSD, a stablecoin that is supposed to be pegged to the U.S. dollar, has been caught in the downdraft. That’s prompted U.S. Treasury Secretary Janet Yellen to repeat her call for regulation in recent weeks.

A regulatory crackdown appears to be coming, but not soon enough for retail investors who’ve already lost their savings.

The industry is still very much the Wild West. Regulators need a bigger stick to keep crypto companies in line, dispel disinformation and stop scammers.

All this double-speak about inflation hedging is a cautionary tale about what bogus claims could be coming next.

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