Coin Security Blog: Bitcoin and Market Uncertainty - On the Hedging Attribute of Cryptocurrencies

Main pointsDuring periods of market turmoil, people often turn to trustworthy investments to protect their wealth. These are commonly referred to as' safe haven assets'

Main points

During periods of market turmoil, people often turn to trustworthy investments to protect their wealth. These are commonly referred to as' safe haven assets'.
Recently, cryptocurrencies such as Bitcoin have been increasingly recognized as a new type of innovative safe haven asset to hedge against economic uncertainty and rampant inflation.
Given the attributes and performance of Bitcoin, its potential feasibility as a means of long-term value storage cannot be ignored. Nevertheless, the digital asset industry is still in its infancy, and we need more time to draw reliable conclusions about the hedging capabilities of cryptocurrencies.

In recent years, the global economy has faced uncertainty, with a series of epidemics and intense regional conflicts leading to sustained market instability, supply chain disruptionsInflation is rising.Since 2021, central banks around the world have been working hard to cope with the soaring inflation caused by the COVID-19 pandemic.International Monetary FundThe data shows that the global average inflation rate will reach 8.7% in 2022, which is more than two percentage points higher than the 6.4% during the 2008 global financial crisis. Although these interest rates begin to slow down in 2023, some experts are still preparing for the possibility of an upcoming recession, as the global economic outlook faces geopolitical shocksContinuing to deteriorate.

In such chaotic and uncertain times, people often turn to trusted assets to protect their asset value and hedge against the risk of a surge. These investments are referred to as' safe haven assets' and are typically expected to maintain their value during periods of increased risk of fiat currency and stock depreciation. In recent years, cryptocurrencies such as Bitcoin have increasingly been regarded as safe haven assets, providing innovative alternatives to traditional approaches. This article will explore the argument that cryptocurrency, especially BTC, can serve as a safe haven asset, and delve deeper into macroeconomic dynamics, cryptocurrency mechanisms, and critics' objections.

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FIAT system

The current global monetary system mainly relies onBased on legal tenderCurrency is supported by trust in the government and central bank, rather than gold or other commodities. In the legal tender system, the central bank can respond to economic uncertainty and inflation by adjusting policy tools such as interest rates and reserve requirements. They can also increase the money supply to stimulate growth.

Although the responsiveness of monetary policy has strong adaptability, if policy choices are proven ineffective, it may also exacerbate economic problems. This is related to the nature of monetary policy in existing financial systems that adopt centralized decision-making processes. The vulnerabilities in this system have led many people to distrust it and seek alternative solutions. This is the charm of cryptocurrencies, derived from their decentralized algorithmic nature.

How is cryptocurrency different?

The operation of cryptocurrency is fundamentally different from traditional legal systems. Their decentralization means that they are not subject to the jurisdiction of any central authority, and their monetary dynamics are determined by algorithms rather than human decision-making. The design of digital assets differs from the behavior of traditional financial instruments, reflecting the fundamental vision behind this asset class, which is to create a system that is not affected by traditional financial structural issues.

This vision is why we have seen the emergence of various cryptocurrencies, each attempting to improve traditional financial mechanisms in its own way. A common defining feature is the interaction between inflation and deflationary dynamics. Please note that the terms "inflation" and "deflation" here refer to changes in the money supply, rather than changes in prices in traditional economic usage.

Inflation and deflation in cryptocurrencies

The design purpose of inflation cryptocurrency is to increase its circulating supply over timeGradually increase. This occurs through various mechanisms, includingminingorpledge. Its basic idea is similar to fiat currency, where the central bank prints more money. The introduction of inflation is aimed at incentivizing cybersecurity and participating in and replacing lost coins. However, if the increase in supply exceeds demand, it may lead to depreciation over time, just like fiat currency.

On the other hand, the design purpose of deflationary cryptocurrencies is to reduce supply over time. This occurs through various mechanisms, such asburningorhalveor