Sterling-to-Bitcoin trading volumes surged following former British Prime Minister Liz Truss’s mini-budget announcement last month.
Increasing economic instability, especially in the UK, has seen investors turn to Bitcoin as a hedge against inflation.
Former British Prime Minister Liz Truss unveiled her economic agenda of sweeping tax cuts on Friday, September 23. This sent UK bond yields skyrocketing, markets roiled, and investors flocked back to Bitcoin.
The following Monday, exchanges saw a record surge in British pound-to-Bitcoin transactions, amounting to 846 million British pounds ($955 million). This led to trading volumes between the pound and Bitcoin soaring 233% in September from the previous month.
Although different, similar uncertainty in the euro area due to the war in Ukraine caused this figure to rise to 68%.
The riots caused by Truss’s “mini-budget” also caused the pound to fall to its lowest level against the dollar, and its volatility to increase.
Surprisingly, as Bitcoin’s volatility dipped to its lowest level so far this year, it almost matched that of the pound. Even the volatility of safe-haven assets such as US bonds has recently matched or exceeded that of Bitcoin.
Bitcoin Inflation Hedging Argument Resurfaces
As a form of digital gold, cryptocurrency advocates have argued that Bitcoin similarly acts as a safe haven asset. One reason is that Bitcoin is independent of any centralized authority, such as a central bank, that could manipulate its supply.
Additionally, with Bitcoin limited to a supply of 21 million, proponents also believe it serves as a hedge against inflation.
Nevertheless, even as its price fell, institutional investment in the cryptocurrency continued to rise over the past year. This caused it to trade more similarly to other traditional risk assets, weakening Bitcoin’s case as an inflation hedge.
However, recent events have seen this argument resurface, especially Bitcoin’s recent moves relative to the aforementioned asset.
Not only have correlations with riskier assets decreased, such as with the tech-heavy Nasdaq, Bitcoin has been trading more and more like gold.
Notably, inflation rates have reached new highs around the world and many countries are struggling to avoid a recession. Bitcoin, like most other assets, is struggling to remain a lucrative investment option, but that doesn’t necessarily mean it has completely failed as an inflation hedge, some say.
In this regard, Kasper Vandeloock, CEO of cryptocurrency quantitative trading firm Musca Capital, argued earlier this month that BTC is still one of the best-performing assets despite the recession, but it depends on how you frame it. The CEO explained this further:
“Sure it’s down 75%, but when you compare it to the strongest asset out there, when you compare it to currencies like the Turkish lira, it shows more strength. Also, it’s not like other hedges, like gold, that they have never suffered a big drop. One factor that many people forget is that an inflation hedge is a kind of “insurance” like real estate, whereas gold is difficult to store and sell as it is illiquid. Bitcoin offers many advantages that those assets don’t have.”
Security with Sunak
Meanwhile, Truss resigned as Prime Minister and the ruling Conservative Party subsequently chose Rishi Sunak as her replacement. The rise of Sunak, who previously served as Chancellor of the Exchequer (His Majesty’s Treasury), restored confidence in the British economy.
Consequently, the trading volumes between the British pound and Bitcoin have returned to the levels prior to the announcement of the mini-budget. However, the incident and the prevailing market conditions have shown the attractiveness of Bitcoin in a crisis.
By Audy Castaneda
