Can Bitcoin replace gold as a hedge against inflation?

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Can Bitcoin replace gold as a hedge against inflation?

is Bitcoin inflationary? Gold vs Bitcoin, Best Crypto for Inflation, 2021 CPI
Image source: tungtaechit, Shutterstock.com

Highlights

  • Bitcoin is an international asset class whose value rises and falls according to demand
  • In the year till October, CPI was 6.2%, meaning one dollar today is 6.2% less valuable than it was a year ago
  • Bitcoin’s return in 2021 alone is around 90% - a vastly better figure than both that of the inflationary figure and the stock market

When US inflation figures came out in October, many, including the Federal Reserve, had underestimated just how much inflation would rise.

At the same time, Bitcoin was reaching a new record high of around US$69,000, leading many to believe that Bitcoin had become the new hedge against inflation, taking over gold.

Just as people were thinking that, Bitcoin dropped and dropped and dropped, and today sits at approximately US$56,600 – a nearly 20 percent loss in a little over a week.

In true Bitcoin style, as people zigged, it zagged, leaving many wondering: Is Bitcoin a  better hedge against inflation than gold?

The CPI Data

The Consumer Price Index (CPI) is a collection reflecting purchases made by an average consumer, including food, energy, and other goods and services.

It found that US inflation was 6.2% meaning one dollar today is 6.2% less valuable than it was a year ago. It should be noted that the 6.2% figure is an average of CPI of a variety of consumer goods and services. For example, used cars increased a massive 20% while some other goods and services increased by only a few percentage points.

The key thing to take away is the 6.2%, which is a comparatively high inflation figure.

Bitcoin as a Hedge Against Inflation

Bitcoin is an international asset class whose value rises and falls according to demand.

When searching for protection against inflation, investors look to find an asset class that offers more than the inflationary figure (in this case 6.2%).

If one looks at the average annual return of the S&P 500, the return is around 7 or 8 percent, which isn’t much more than the 6.2% inflationary figure.

This is when Bitcoin starts to look considerably more attractive. The first reason is it sidesteps many of the political and economic risks associated with the U.S. stock market.

More importantly, though, Bitcoin’s return in 2021 alone is around 90% - a vastly better figure than both that of the inflationary figure and the stock market.

Bitcoin vs Gold

The 90% year-to-date return on Bitcoin is also vastly different to the average annual return on gold, which, according to statista.com averaged at around 10.6% from 1971 to 2019. Source

Bitcoin actually shares some similarities to gold, in that it’s durable, easily interchangeable, secure, and scarce.

Where Bitcoin is vastly different to gold, however, lies in its decentralised nature.  Whereas the supply of gold is mostly controlled by sovereign nations like the U.S., China, Germany, and other European nations, anyone in the world can store and easily protect their Bitcoin much easier than gold.

There are those that might argue that gold has more intrinsic value than Bitcoin, but it’s true that Bitcoin’s blockchain possesses practical use cases and that will only increase as more places and businesses adopt it.

The Verdict

What scares people away from Bitcoin is its extreme volatility. In the past two weeks alone, Bitcoin has both rocketed to an all-time high and lost almost 20%.

However, if one can withstand the rapid rises and falls, over time Bitcoin may prove to be a far superior asset class against inflation.

Disclaimer

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