Now that Bitcoin has lost more than one-third of its value so far this year, what does the future hold for the famed cryptocurrency, and all other cryptocurrencies, as a hedge against inflation?

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The price of Bitcoin has collapsed so far this year by more than one third, to$28,793 as of May 24, and is continuing to head south, suggesting that the worst could be yet to come. 

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Bitcoin, and all the thousands of other coins -- known as altcoins (Ethereum, Tether, Solana, Dogecoin, stablecoins, and the like) -- are unlikely to see much in the way of gains this year. They are "dead money," as the saying goes on Wall Street. And they could fall further as interest rates continue to rise. 

Cryptocurrencies, which offer no yield, are now becoming less attractive in a market where rates are driving higher yield on debt instruments that have a guarantee of value. As Alesia Haas, the chief financial officer of Coinbase, the crypto pioneer that handles custody for many crypto buyers, told investors at a conference in March, "We have incredible macroeconomic uncertainty. We have inflation. We have a lot of people moving to a risk-off mindset in terms of their investing style, and crypto, because of its newness and recency, is a riskier asset class, and so we're seeing money move away from it because of those macro conditions."

The Federal Reserve Bank's raising of interest rates isn't helping crypto values either. Analyst Chaim Siegel of Elazar Advisors told clients in a note this month, "The Fed's moves are right now against assets that benefit from inflation with no yield like crypto. I don't think crypto investors think about the Fed but the Fed is shaking the crypto trees right now."

Already this year, crypto has seriously underperformed most asset classes. The 38% drop in Bitcoin since January 1, is far worse than the 28% drop in tech stocks, based on the return of the tech-heavy Nasdaq Composite Index. Ethereum's Ether coin has been an even greater disaster, dropping 48%. (Prices and market returns are as of May 24.)

The deep decline in the Nasdaq presents an additional challenge for crypto. Investors who can suddenly buy some of the best tech stocks for a serious discount may be less inclined to spend their money on such an entirely speculative instrument as crypto. 

Faced with a choice on whether to put$100 into Bitcoin, or use the same money to buy a share of Twilio (symbol TWLO) -- a cloud communications tech company that has$5.2 billion in cash and equivalents on its balance sheet, is growing revenue at 48% a year, and is now down 72% from where it was a year ago -- many investors will choose the latter given the likelihood of Twilio's share price ultimately rising to reflect healthy business fundamentals. 

The fact that$100 can buy an actual share of Twilio, versus only a minute fraction -- one-third of 1% -- of one Bitcoin, psychologically adds weight to buying Twilio stock versus the famed crypto coin.

Crypto is further hampered by the fact that it has failed to prove itself as a hedge against inflation. If Bitcoin had maintained its value in the face of record inflation, it might have been a haven for assets. You would have been better off just holding US dollars this year, as the dollar has maintained an exchange value where Bitcoin hasn't. The dollar is up 6% versus the Euro so far this year, for example. With the notion of crypto as a hedge against inflation shattered, a good chunk of crypto's appeal is also destroyed. 

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A further problem for crypto is the large losses incurred so far by many crypto buyers. Coinbase told Wall Street analysts during its first-quarter conference call this month that deposits have surged by billions of dollars. But trading volume was down 44%, the lowest since mid-2020.

More money on deposit, and lower trading action amidst substantial price declines, suggests clients of Coinbase may have seen declines even as they plowed money into crypto in the past six months. If that's the case, then it's unlikely those buyers are going to add to their crypto holdings while trying to get over their existing losses. 

Without forecasting what will happen this year, Coinbase CEO Brian Armstrong made an ominous statement:

"I think in the up markets, people are irrationally exuberant, and then in the down markets, people are irrationally pessimistic. And remember, this is just like we had one quarter where the market pulled back. I think there will be blood running in the streets if it continues for four quarters." 

You would do well to pay attention to what Armstrong says. Last year, when Bitcoin was vaulting to its all-time high of$68,790 per coin, Armstrong was warning there was a good chance of a major plunge in the currency, and that's what happened. 

If Armstrong's prophecy of "blood running in the streets" is a likely prospect, then you can expect, at best, very little gain in Bitcoin as investors suddenly seek a haven in fixed income and reasonably-priced stocks. 

What will it take to bring crypto back? Either an end to the rate-hike regime; an overbought tech-stock market, where investors start to take profits and look to put money into something else; or a still-rising inflation trajectory that could reignite the idea that crypto is an inflation hedge, even if it's false (after all, some investors have short memories.) 

What can you do in the meantime? If you hold crypto, you'll want to hold on to it hoping at some point it will come back. You may, however, want to explore options in crypto staking, whereby you can get paid to lend your Ether and other currencies. You'll be rewarded in the same devalued currencies, but at least when the dust settles, you'll have more coins to show for your pain. 

Also: Don't buy crypto unless you're fully prepared to lose your shirt

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