For years, inflation was primarily a concern for emerging markets, where volatile currencies and economic instability made rising prices a persistent
For years, inflation was primarily a concern for emerging markets, where volatile currencies and economic instability made rising prices a persistent challenge. However, in the wake of the COVID-19 pandemic, inflation became a global issue. Once-stable economies with historically low inflation were suddenly grappling with soaring costs, prompting investors to rethink how to preserve their wealth.
While gold and real estate have long been hailed as safe-haven assets, Bitcoin’s supporters argue that its fixed supply and decentralized nature make it the ultimate shield against inflation. But does the theory hold up?
The answer may depend largely on where one lives.
Bitcoin advocates emphasize its strict supply limit of 21 million coins as a key advantage in combating inflationary monetary policies. Unlike fiat currencies, which central banks can print in unlimited quantities, Bitcoin’s supply is predetermined by an algorithm, preventing any form of artificial expansion. This scarcity, they argue, makes Bitcoin akin to “digital gold” and a more reliable store of value than traditional government-issued money.
Several companies and even sovereign nations have embraced the idea, adding Bitcoin to their treasuries to hedge against fiat currency risk and inflation. The most notable example is El Salvador, which made global headlines in 2021 by becoming the first country to adopt Bitcoin as legal tender. The government has since been steadily accumulating Bitcoin, making it a key component of its economic strategy. Companies like Strategy in the US and Metaplanet in Japan have followed suit, and now the United States is in the process of establishing its own Strategic Bitcoin Reserve.
A Bitcoin investment strategy has paid off so far
So far, the corporate and government Bitcoin investment strategy has paid off as BTC outperformed the S&P 500 and gold futures since the early 2020s before inflation surged in the United States.
More recently, however, that strong performance has shown signs of moderation. Bitcoin remains a strong performer over the past 12 months, and while BTC’s gains outpace consumer inflation, economists caution that past performance is no guarantee of future results. Indeed, some studies suggest a correlation between cryptocurrency returns and changes in inflation expectations is far from consistent over time.
Returns over the past 12 months. Source: Truflation.
Bitcoin’s role as an inflation hedge remains uncertain
Unlike traditional inflation hedges such as gold, Bitcoin is still a relatively new asset. Its role as a hedge remains uncertain, especially considering that widespread adoption has only gained traction in recent years.
Despite high inflation in recent years, Bitcoin’s price has fluctuated wildly, often correlating more with risk assets like tech stocks than with traditional inflation hedges like gold.
A recent study published in the Journal of Economics and Business found that Bitcoin’s ability to hedge inflation has weakened over time, particularly as institutional adoption grew. In 2022, when US inflation hit a 40-year high, Bitcoin lost more than 60% of its value, while gold, a traditional inflation hedge, remained relatively stable.
For this reason, some analysts say that Bitcoin’s price may be driven more by investor sentiment and liquidity conditions than by macroeconomic fundamentals like inflation. When the risk appetite is strong, Bitcoin rallies. But when markets are fearful, Bitcoin often crashes alongside stocks.
In a Journal of Economics and Business study, authors Harold Rodriguez and Jefferson Colombo said,
“Based on monthly data between August 2010 and January 2023, the results indicate that Bitcoin returns increase significantly after a positive inflationary shock, corroborating empirical evidence that Bitcoin can act as an inflation hedge.”
However, they noted that Bitcoin’s inflationary hedging property was stronger in the early days when institutional adoption of BTC was not as prevalent. Both researchers agreed that “[…]Bitcoin’s inflation-hedging property is context-specific and likely diminishes as it achieves broader adoption and becomes more integrated into mainstream financial markets.”
US inflation index since 2020. Source. Truflation
“So far, it has acted as an inflation hedge—but it’s not a black-and-white case. It’s more of a cyclical (phenomenon),” Robert Walden, head of trading at Abra, told Cointelegraph.
Walden said,
“For Bitcoin to be a true inflation hedge, it would need to consistently outpace inflation year after year with its returns. However, due to its parabolic nature, its performance tends to be highly asymmetric over time.”
Bitcoin’s movement right now, Walden said, is more about market positioning than inflation hedging—it’s about capital flows and interest rates.”
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