Look at where things stood at the end of June—

June 2022

9.1%

$1,836.57

$19,784.73

So what happened? If Bitcoin was the inflation hedge it was promoted to be, why did the price start collapsing at the end of March 2022? Some have blamed regular, everyday people who invested their stimulus checks into Bitcoin and causing its overvaluation. Others blamed general investor sentiment for Bitcoin’s high valuation. The more investors who believe in it and buy it, the higher the price, and vice versa.

Was it a big lie that Bitcoin was promoted as a hedge against inflation? Not necessarily. Gold has been around for thousands of years — Bitcoin for only 12 years. Crypto is too young to know for sure how inflation will affect it.

Some state that Bitcoin and all crypto should be treated like a tech stock.

How is bitcoin a hedge against inflation

Inflation is insidious, sucking the life out of the finances of individuals, families and nations. The June 2022 inflation rate in the United States was 9.1%, the highest monthly inflation rate since November 1981. The highest inflation rate was recorded in April 1980 at 14.76%.
We haven’t reached that point — yet.

Consider how inflation causes the value of the U.S. dollar to decrease in value. This is why it’s becoming more difficult for families to make ends meet — their paychecks just don’t buy what they used to. Here is how inflation has devalued U.S. currency —

  • What $1.00 purchased in 1980 would cost $3.60 today
  • What $1.00 purchased in 1990 would cost $2.27 today
  • What $1.00 purchased in 2000 would cost $1.72 today
  • What $1.00 purchased in 2015 would cost $1.25 today

Inflation also negatively affects investment portfolios.

How is crypto a hedge against inflation


Let’s say a stock returns 8%, but imagine there is a 9% inflation rate. So investors actually lose 1% on their return.

An inflation hedge theoretically makes up for the decreased purchasing power of a currency that loses its value because of rising prices as a result of inflation. This is an investment that is hoped to keep or increase its value while other investments may be declining in value.

Over the years, gold has been touted as a hedge against inflation — gold stocks, gold bullion and gold coins.
Gold has been viewed as an inflation hedge because it often increases in value as the value of currency declines.

How does bitcoin hedge against inflation

Bitcoin Price data by YCharts

More recently, Bitcoin hasn’t acted like a hedge as actual inflation has taken hold. You can see below that inflation, and inflation expectations, have been rising all year, but Bitcoin is actually down compared to late February. Investors looking to hedge inflation would have been better off buying the iShares TIPS Bond ETF(TIP0.50%), a bond fund of inflation-protected treasuries.

Bitcoin Price data by YCharts

What is Bitcoin if it’s not a hedge?

Over the last decade, we’ve seen Bitcoin’s value swing wildly.

However, it hasn’t been correlated with inflation in any meaningful way.

How is cryptocurrency a hedge against inflation

Data from blockchain analytics firm Chainalysis suggests that Bitcoin (BTC) may not be the hedge against inflation that many seem to believe it is.

“Right now, we can’t show a statistically significant correlation between inflation in the US and Bitcoin prices, but we know anecdotally that many people invest in Bitcoin as a hedge against inflation,” Chainalysis’ head of research, Kim Grauer, told Cointelegraph on Aug. 31 when asked about her thoughts on current inflation in the U.S. and its impact on Bitcoin.

U.S. inflation has been a hot topic over the past year or two. Back in June, reporting showed inflation in the U.S. reaching levels unseen in over a decade.

Other countries have experienced much worse inflation than numbers seen in the United States. Venezuela, for example, saw 10,000,000% inflation in 2019.

Is bitcoin a hedge against inflation reddit

One of the common investment theses behind Bitcoin(BTC-0.87%) is that it’s a great hedge against inflation. There are only 21 million Bitcoin available once they’re all mined, limiting supply. In theory, this limited supply should mean that Bitcoin is a good hedge against the increased supply of the U.S.


dollar.

This theory comes into question when we look at the data about Bitcoin’s price trends and real inflation. Does Bitcoin really trade as an effective hedge to inflation, or is there something else to its moves?

Image source: Getty Images.

Why Bitcoin is viewed as an inflation hedge

The theory behind Bitcoin as an inflation hedge is simple enough. The number of Bitcoin is limited to 21 million, while the number of U.S.

dollars typically increases over time. With everything else being equal, if the supply of the U.S.

Is crypto a hedge against inflation reddit

In May 2020, the billionaire investor Paul Tudor Jones supposedly purchased Bitcoin as an inflation hedge.

The rapid rise of the price of Bitcoin seemed to substantiate such claims —

Date

US Inflation Rate

Gold Spot Price

Bitcoin Price

May 2020

0.12%

$1,715.91

$9,461.06

December 2020

1.36%

$1,858.42

$29,001.72

June 2021

5.39%

$1,834.57

$35,040.84

December 2021

7.04%

$1,790.43

$46,306.45

February 2022

7.87%

$1,856.30

$43,193.23

March 2022

8.54%

$1,947.83

$45,538.68

But at the end of March 2022, the price of Bitcoin started dropping — and dropping — and dropping as inflation rose.

Bitcoin in dollars should also increase.

Here is an extremely simplistic example of the value of Bitcoin if the supply of dollars doubles. I assume that the “market cap” of U.S. dollars and Bitcoin are equal in both scenarios.

Note: Author’s calculations.

If the supply of U.S. dollars doubles, then it makes sense that the value of a Bitcoin would double in relation to the U.S. dollar. The market doesn’t always work in this simple way, though.

Bitcoin hasn’t been a hedge so far

If we go back to pre-pandemic days, Bitcoin doesn’t look like a hedge at all.
Bitcoin rose in popularity in late 2017 but then crashed in 2018 and early 2019, and that didn’t have anything to do with inflation. Over this time, the M2 money supply rose 25.3%, and gold would have been a better direct hedge, rising 51.9%.

But the spot price of gold fluctuates and investors sometimes have to hold it for a long time.

Consider how the spot price of gold has fluctuated since 1980 —

  • 1980 – $594.90
  • 1990 – $386.20
  • 2000 – $272.65
  • 2015 – $1060
  • July 20, 2022 – $1714

So has gold really been a reliable hedge against inflation? That’s certainly debatable.

In the past 12 years, Bitcoin

BTC/USD

has been promoted by enthusiasts as a hedge against inflation. Since Bitcoin is limited to only 21 million coins, they claimed that it would be able to function better than gold. Bitcoin enthusiasts said that Bitcoin is immune to the impact of world-wide political tensions or the policy of governments.
They made such a claim because of Bitcoin’s decentralized nature.

You can see below that Bitcoin hasn’t been consistently correlated with growth stocks or inflation stocks and for large portions of the last year were negatively correlated (a correlation coefficient of 1.0 means they’re highly correlated while a coefficient of -1.0 means they move in opposite directions).

Fundamental Chart data by YCharts

I see the recent rise in Bitcoin as a speculative move driven by millions of people with excess stimulus cash and ample time to trade in the high-flying cryptocurrency market. That has brought in more institutional money, pushing values even higher. At the end of the day, it’s not clear whether Bitcoin is like digital gold, some kind of utility, or just a speculative asset.

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