What is bitcoin meant to hedge?

Conversations arose on Saturday as the cryptocurrency experienced a nearly 10% decline, dropping from around $70,000 to below $62,000, prompted by Iran's unsuccessful missile strike on Gaza. This sparked discussions, including insightful analyses from Fortune's Jeff John Roberts, contextualizing it against gold's 17% surge, and Blockwork's Casey Wagner, examining the typical movement of gas prices during Middle Eastern crises. While oil and gold saw more buyers than sellers post-attack, resulting in their price increases, bitcoin witnessed more sellers than buyers, causing its value to decline. However, I've always believed that intraday price shifts in such a volatile asset as bitcoin hold little significance. Unfortunately, gold continues to rise, reminiscent of its behavior after the Lehman Brothers' collapse, while bitcoin, after a brief uptick on Sunday, has steadily declined throughout the week, reaching the low $60K range.

The looming threat of WWIII may be affecting bitcoin sentiment, but market response likely stems from hints from the Federal Reserve about prolonging higher interest rates due to strong economic performance. Questioning bitcoin's role as a hedge, given its tech stock-like behavior, may miss the mark. Pre-pandemic, bitcoin showed little correlation with the S&P 500, indicating its potential as a countercyclical asset. What changed? What exactly does bitcoin hedge? Stocks? Inflation? Treasuries? Political instability? Bitcoin seems to serve as an economic safe haven for various scenarios. Factors such as increased circulation, holders, and institutionalization contribute. Bitcoin's volatility has decreased over time, particularly since the launch of spot bitcoin ETFs, suggesting growing institutionalization and stability.

Volatility, while a defining characteristic of bitcoin, isn't permanent. Austin Campbell from Columbia Business School notes that as markets mature, volatility typically decreases with increased liquidity and scale. The introduction of spot bitcoin ETFs, rapidly growing financial products, may expedite this process. As bitcoin becomes more mainstream and accessible, its correlation with stocks may strengthen as investor behaviors align. The concept of "hyperbitcoinization" hinges on the notion that as bitcoin adoption grows, its volatility will diminish, making it a viable medium of exchange. However, this idea assumed that widespread bitcoin adoption would lead to the decline of fiat currencies, thereby reducing bitcoin's volatility and correlation. Essentially, bitcoin's hedge was expected to be its decreasing volatility and increased independence from traditional financial systems.

The notion that Bitcoin is "digital gold" is rooted in a foundational myth, suggesting it possesses value akin to gold. However, this comparison set up unrealistic expectations before Bitcoin's behavior was fully understood. This label has led to a mix of perceptions about Bitcoin—it's seen as a hedge, a store of value, a payment method, a speculative investment, and even a development platform. There's a desire for Bitcoin to fulfill multiple roles simultaneously, but in reality, it has excelled primarily at one thing: absorbing excess liquidity. How Bitcoin would fare in a crisis remains uncertain. S&P analysts highlighted in a 2023 report that Bitcoin's growth may be linked to unprecedented levels of monetary easing by central banks since 2008/09, suggesting it grew alongside the expansion of the money supply.