Can Bitcoin Protect You Against Rising Inflation?

Market volatility and geopolitical tensions remain high amid an ongoing Russian currency crisis, and the United States’ highest CPI print in 40 years. Where does Bitcoin fit into this inflationary environment?

Inflation at an all time high, interest at an all time low. Fiscal policy, monetary policy, foreign policy, domestic policy, energy policy, labor policy, trade policy, manufacturing policy, and healthcare policy are all inflationary. #Bitcoin is hope. https://t.co/JJjGVjci2F
— Michael Saylor⚡️ (@saylor) March 2, 2022

As the “digital gold” narrative gained institutional traction in 2021, much of that argument rested on the belief that Bitcoin provided a hedge against inflation.

However, Bitcoin hasn’t performed as expected, nor has it been predictable. Most of the time it’s acted as a high-risk technology stock, experiencing sharp drawdowns whenever the market shifts risk-off. This broad correlation with equities was, however, recently reversed amid a widespread market sell-off following Russia’s invasion of Ukraine.

Notably, one of the main features of the “digital gold” narrative is that Bitcoin trades (or is otherwise supposed to trade) the same way as gold during these inflationary bouts. A failure to provide short-term protection against inflation is therefore viewed by some as a fatal flaw. This reasoning is however misguided.

Bitcoin as an Inflation Hedge

When considering whether an asset like Bitcoin is an inflation hedge, one shouldn’t be looking at how it reacts to the news cycle. Instead, we should zoom out and evaluate its performance over long periods of time.

Looking at gold, it tends to be the type of asset that underperforms for much of the time but dramatically outperforms in specific periods. This is reflected in the illustration below:

By contrast, Bitcoin has tended to outperform inflation over relatively short and long periods:

Despite being down more than 40 percent from its all-time high, even at the current price of US$38,775, Bitcoin has dramatically outperformed both gold and the broader US stock market over periods exceeding one year.

Key Takeaway

When it comes to evaluating whether an asset acts as an inflation hedge, it is critical to consider its performance over longer periods. How a particular asset fluctuates in response to news, while interesting, tells us nothing about its capacity to protect purchasing power over extended periods of time.

If you were one of the 1.1 billion people living with double-digit inflation, which asset would you be turning to? Available data tends to suggest that Bitcoin is a good bet.