This analysis was first published in SvD Näringsliv, in Swedish, on December 3rd, 2021.

How best to hedge against rising inflation? Ask a major US bank and, among many investors, the answer seems to be bitcoin. But new numbers show that the cryptocurrency behaves more like a regular asset class than many believe.

The message from the finance house JPMorgan Chase was clear: inflation concerns have, once again, put the fear into investors. And in the hunt for a hedge — a position meant to reduce risk exposure — people have turned back to bitcoin. And, the bank’s experts noted, some investors have even started to view bitcoin as a better hedge than gold — the traditionally safe haven in turbulent times.

Johan Javeus, chief strategist at SEB, is on the same track. In an interview with TT, he points to bitcoin as a way to try to handle inflation:

“Both in the US and Europe, the central banks are printing an enormous amount of money right now. They create money out of thin air and there’s more money in the economy — that contributes to the value of money going down. That problem doesn’t exist for a cryptocurrency like bitcoin, because the supply is limited. In that sense, you can say it’s a hedge against inflation.”

Comparisons between bitcoin and gold are not new. Crypto terminology like “mining” — extracting from a mine — comes from exactly there. The reasoning is that there is only a certain amount of bitcoin (21 million, to be exact) and that it should therefore be a stable store of value over time.

Stability, however, is not something bitcoin and other cryptocurrencies have made themselves known for — at least not so far. Enthusiasts argue, though, that bitcoin’s volatility is decreasing and becoming less of a problem. Bitcoin can work as a hedge against inflation, but above all against the broader stock market too, they argue. The received wisdom among crypto investors is that the currency’s price shouldn’t behave the way stocks do overall.

It’s a thesis that has come unstuck lately. Instead, new figures show that the correlation between bitcoin and the large-cap index S&P 500 over 100 measured days this autumn has been among the strongest of the entire year. That is: when the stock market has gone up, bitcoin has followed, and vice versa. The exact opposite of the reasoning above.

The question of what role cryptocurrencies can play in an investment portfolio has also been the subject of research. In a recently published study from the University of Western Australia, a trio of researchers looked at how well bitcoin could work as a hedge against volatility in the S&P 500. The result was another bit of a buzzkill for some investors, with the conclusion that bitcoin was “a rather poor hedge and diversifier of risk” in that context. On the contrary, portfolio risk rose even when exposure to bitcoin was as low as one percent. There are, of course, more reasons to include different types of assets in a portfolio than just minimising risk. But the study effectively undermines the argument that bitcoin should be counter-cyclical.

So how should you think about bitcoin and other cryptocurrencies? To begin with, it’s worth remembering that all cryptocurrencies are different. Not all of them, like bitcoin, have a fixed supply. Ethereum, the world’s second largest cryptocurrency, was expanded and had new currency continuously added until this past summer — when they changed their technical system to reduce the risk of inflation. So it’s not the crypto technology itself that protects against inflation — whether you buy the thesis about its function as a hedge or not.

On top of that, you can clearly see an institutionalisation of the crypto world, which matters in this context. Coinbase, one of the biggest crypto exchanges, reported in its third quarter that a full 72 percent of trading volume was done by institutional traders. Beyond that, there are now several exchange-traded funds that track the bitcoin price, without savers needing to buy the underlying asset.

Could it be that the crypto world is being normalised? And in doing so both stepping into Wall Street’s better rooms and losing a bit of the novel lustre it once had. Tim Cook, CEO of Apple, described his view of cryptocurrencies like this: “I think it’s reasonable to have as part of a diversified portfolio.”

An asset like any other, in other words.

It’s a fair distance from the financial revolution that was promised by some of the earliest enthusiasts at the start.