Is Bitcoin a Hedge against Inflation?

Before you even delve into this controversial question, I want you to pause and establish your opinion about this. Do you think that Bitcoin is a hedge against inflation? Why or why not?

Before we answer the above question, we will first define a few important terms:

·         Bitcoin – The first ever created Cryptocurrency, it is the most popular and largest by market capitalization.

·         Inflation – a gradual decline in the purchasing power of a given currency. This means that you will be able to purchase lesser items with a given amount of money. Inflation can also be viewed as a measure of the rising prices of goods and services in a given economy.

·         Hedge against inflation –  this is any asset or investment whose value is not vulnerable to inflation thus protecting investors’ assets against extreme price inflations.

Hedge against Inflation

Figure: Bitcoin as a hedge against Inflation (Source Market review)

Is Bitcoin a hedge against inflation?

With more money being printed worldwide, inflation is almost guaranteed and investors are looking for ways to hedge against the rise in inflation. Bitcoin seems to be the leading asset as far as hedging against inflation is concerned.

Generally, inflation is considered to be a positive sign of growth. Since inflation is usually beyond their control, investors can only think of ways to cope. Therefore, investors usually look for havens for their assets during inflation since it would be unwise to hold on to their assets in cash while watching its value continue to depreciate.

Some of the assets that people consider to be a store of value are stocks, bonds, Bitcoin, Crypto, and precious metals such as gold. These assets either retain their value or even experience appreciation during inflation.

·       Why Bitcoin is considered as a hedge against inflation

The main reason why Bitcoin is considered as a hedge against inflation by many is its limited supply. The total number of Bitcoin that could ever exist is limited to 21 million coins. Conversely, the total number of fiat currency say the dollar is bound to increase with printing.

With everything held constant, if the supply of the US Dollar increases, the value of Bitcoin in dollars should also increase.

Think of the following scenario, say the supply of the dollar doubles then the value of BTC against the dollar doubles as well. This can best be illustrated as follows:

CurrencySupply scenario 1Price scenario 1Supply scenario 2Price scenario 2
US Dollar1 trillion$12 trillion$1
Bitcoin21 million$47,62021 million$ 98, 240

·       Challenging the narrative

With the onset of the Corona pandemic, the economy began to crash exhibiting tremendous inflation; people expected Bitcoin to be a hedge against inflation. However, it soon became quite clear that even though Bitcoin was insusceptible to the worldwide crashes, it was also independent of the inflations.

Bitcoin prices continued to rise and fall as usual seemingly independent of the ongoing inflations. The price swings were as sudden and dramatic as usual; to this day Bitcoin prices have not been correlated with inflation in any meaningful way.

The price surges are often caused by speculation rather than inflation. For this reason, specialists have challenged the common narrative even stating that Bitcoin is not a good hedge against inflation. What do you think? Is it time for investors to find a better investment thesis for this digital asset? 

Read more: How to Invest In Central Bank Digital Currency

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