With inflation repeatedly hitting four-decade highs, the need for hedges against it has rarely been higher. Many crypto enthusiasts have claimed that Bitcoin and other digital currencies are excellent inflation hedges, but not everyone agrees.
The Latest Inflation Reading
The March inflation reading from the U.S. Bureau of Labor Statistics showed an 8.5% year-over-year increase in inflation, which just barely edged out the expected CPI rate of 8.4%. It was also yet another record high for the last 40 years, so it’s no surprise that talk about the possibility of a recession is starting to circulate on Wall Street.
Excluding food and gas, core CPI slowed to an increase of 0.3% month over month, which was better than the consensus expectation of 0.5%, which was the same as the previous month’s reading. Although that shows that inflation is slowing, the U.S. consumer still isn’t in great shape with prices for necessities like food and gas up so much.
“It is hard to be overly optimistic about the U.S. consumer, given the significant declines with real average weekly earnings, widespread gains across food, energy, and shelter, and as geopolitical uncertainty could keep commodity prices elevated,” Edward Moya of OANDA said in a recent email. “Inflation will take care of itself if geopolitical risks improve and expectations should remain that the Fed won’t have to aggressively tighten policy and send the US economy into a recession.”
What Does It Take to Be an Inflation Hedge?
Suddenly, those raises so many Americans received within the last 12 months don’t seem so great because wages are not keeping up with inflation. Many investments aren’t keeping up either, so investors are seeking refuge in a variety of places—anywhere they can to avoid holding cash, which is losing purchasing power virtually by the day.
Some common inflation hedges include gold, real estate, and even stocks in some cases. Additionally, many investors are looking to bitcoin as an inflation hedge as well because of one thing those three assets have in common: they are all stores of value. In each case, the idea is to store money in an asset that will increase in value.
However, to be a true inflation hedge, the asset must increase in value faster than inflation raises prices so that when the investor sells it, they won’t lose money. Many investors see gold as the classic inflation hedge because it typically outperforms many other asset classes during inflationary periods, enabling them to store their money in an asset that’s increasing in value while their ability to buy things with dollars declines.
Is Bitcoin an Inflation Hedge?
In addition to rising in value faster than inflation, inflation hedges must also be scarce, accessible, and durable. In other words, the supply must be limited so that increased demand will continue to push prices higher, while the market will continue to see value in the asset and accept it. Durability means the assets must continue to attract demand over time.
The debate over whether bitcoin is an inflation hedge has been going on for quite some time, but we don’t expect it to be settled any time soon. On one hand, we have high-profile crypto enthusiasts like billionaire hedge fund manager Paul Tudor Jones, who said he sees cryptocurrency as a better inflation hedge than gold.
Specifically, he described bitcoin as “a great way to protect wealth over the long run” and “a store of wealth like gold.” JPMorgan sided with Jones in a note to clients in October 2021, saying that it looked like institutional investors were returning to bitcoin, “seeing it as a better inflation hedge than gold.”
On the other hand, rating firm Morningstar said in November 2021 that the belief that cryptocurrency is an inflation hedge “rests on scanty evidence.” The firm added that it’s “reasonable to suppose that cryptocurrency will help a portfolio survive inflation’s ravages,” but such a plan is “far from guaranteed.”
Bank of America sided with Morningstar, saying that bitcoin “has not been compelling as an inflation hedge,” adding that commodities and even equities were more highly correlated with inflation.
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Will Bitcoin Become an Inflation Hedge One Day?
One of the biggest issues with bitcoin being an inflation hedge is its lack of history. With little more than a decade of trading history, we don’t have enough of a track record to know how it will typically behave during inflationary periods. On the other hand, we know that gold usually outperforms riskier assets during periods of inflation, but we also know that it doesn’t always work like that.
Bitcoin’s problem right now is that it tends to be more correlated with riskier assets, preventing it from being a true inflation hedge despite its scarcity and the widespread view that it’s a store of value—essentially, digital gold.
Many analysts have argued earlier this year that bitcoin can become a real store of value and potentially a true inflation hedge if or when the market matures enough to withstand volatility and sudden price drops. That kind of support is usually offered by institutional investors.
Here’s What May be Needed for Bitcoin to Become an Inflation Hedge
However, I would like to add that institutional investors have either been pouring into the crypto market or running to the exits at the same time. Additionally, we have massive investors known as “bitcoin whales” who may suddenly bring their holdings into play or let them fall dormant for an extended period.
As of February, more than 60% of the bitcoin market was lying dormant for at least a year. In a mature market, the amount of trading activity would be massive compared to the amount of the assets being stored.
In terms of gold, to which bitcoin is frequently compared, most investors don’t even take delivery. Instead, most investors are actively trading futures contracts, as some estimates suggest that, on average, less than 5% of futures with some type of delivery mechanism result in actual delivery. The trading activity is virtually nonstop, unlike the massive percentage of bitcoin that lies dormant for extended periods.
Do you think bitcoin is an inflation hedge? Or do you think it will be at one point? Share your opinions in the comment section below.
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