Bitcoin (BTC) was created in the wake of the 2008 financial crisis and planned to solve the problems created by lax monetary policies. The creator of the cryptocurrency, Satoshi Nakamoto, said in late 2008 that the supply of the cryptocurrency increases "For a planned amount" that "does not necessarily result in inflation."
The cryptocurrency's inflation rate has been set and its circulating supply is capped at 21 million coins, expected to be mined by 2140. By then, BTC's inflation rate will drop to zero. In contrast, fiat currencies do not have a finite supply and can be printed to adjust monetary policy.
An expansionary monetary policy, such as the one carried out in recent years by most countries in the world, aims to expand the money supply by lowering interest rates and seeing central banks engage in quantitative easing.
It has long been believed that this expansionary monetary policy lead to higher inflation, defined as the devaluation of a payment vehicle amid the increase in the cost of goods and services. In November, inflation in the United States rose to a maximum of 30 years while eurozone inflation Recorded the highest figure in the 25 years for which data has been collected.
Cointelegraph reached out to several industry experts to comment on these figures, with virtually all of them pointing the finger at expansionary monetary policies. Speaking to Cointelegraph, Chris Kline, chief operating officer and co-founder of the crypto retirement platform Bitcoin IRA, said that inflation is not transitory and is forcing people to "find an alternative to protect their assets."
Kline noted that while gold and real estate were solid options in the past, real estate prices are now "off the charts," while gold is "unaffordable to the average American." Bitcoin, he added, is now part of the "inflation hedge mix" because its supply cannot be manipulated in the same way as the supply of fiat currencies.
Speaking to Cointelegraph, Martha Reyes, head of research at cryptocurrency exchange Bequant, noted that the market reacted quickly to the latest inflation figures by pricing in potential interest rate hikes from central banks. For Reyes, the "fundamental cause of these high inflation readings is a large increase in the money supply, since trillions of dollars in new money were created due to the pandemic."
Historically, gold has been used as a hedge against inflation. Bitcoin and other cryptocurrencies are often referred to as "gold 2.0" because they possess properties that could turn them into a digital version of the precious metal.
Crypto as a solution against inflation
Cryptocurrencies are known for their strong volatility, with drops of up to 50% occurring in short periods of time, even for top-of-the-line crypto assets. This type of volatility has left many questioning whether BTC and other cryptocurrencies could be a viable inflation hedge.
In a note sent to clients, strategists at Wall Street banking giant JPMorgan have suggested that 1% portfolio allocation to Bitcoin it could serve as a hedge against fluctuations in traditional asset classes. Billionaire investor Carl Icahn also endorsed BTC as a hedge against inflation.
Speaking to Cointelegraph, Adrian Kolody, founder of the decentralized non-custodial exchange Domination Finance, echoed Kline's sentiment that Bitcoin is a solution to inflation, but noted that in the cryptocurrency space, there are other ways to hedge against. inflation.
Kolody pointed to the decentralized finance (DeFi) sector as a viable alternative. Suggested that when using stable coins - cryptocurrencies with price control mechanism - and decentralized applications (DApps), investors could "beat inflation" while resisting the "risks of a spot position". To do this, they would simply have to find a way to earn interest on their stablecoins that would be above annual inflation rates. Kolody said:
"The best way to look at it is that crypto gives you the flexibility to take control of your finances in a variety of methods instead of being at the mercy of the federal government."
Reyes noted that Bitcoin is "more attractive as a store of value than other assets such as commodities" as the growing demand can only be met by increasing prices and not by additional production.
The exchange's head of research added that the cryptocurrency is in an "early-stage adoption phase," meaning it "doesn't tend to have consistent correlations with other assets, and its price appreciation should come from downsizing cycles. to the middle and the growth of the network. " "
Bitcoin, he added, is, as such, more "resilient to economic downturns, although in a strong market sell-off, it would likely be initially affected as well as some investors cut positions across the board."
Earlier this month, Bitcoin apparently showed its potential as a hedge against inflation, as hit a new all-time record in Turkey when the country's fiat currency, the lira, went into free fall. Others argue that people in Turkey would have been better off investing in gold.
Utility and freedom, or an inherited asset?
Bitcoin has largely outperformed gold so far this year, as it is up 94% since the beginning of January. Gold, by comparison, fell more than 8% over the same period, meaning it has so far failed investors who gambled on the precious metal to hedge against inflation.
In the short term in Turkey, the precious metal did exactly what it had to do: it protected people's purchasing power by maintaining its value as the lira plunged. For the past 30 days, it even outperformed BTC in lira terms.
As we zoom out, it's clear that BTC was a much better bet, up 270% against fiat currency so far this year compared to 70% for gold. The data shows that investors would only have been better off betting on gold when the crisis intensified, but that in the long run, BTC would have been a better bet.
On whether investors should choose Bitcoin or gold as an inflation hedge, Kolody argued that a "Bitcoin and crypto standard" is a better alternative to a fiat currency or the gold standard, adding that not having trust and permission helps cryptocurrencies stand out.
This, he said, allows crypto and DeFi structures to be as powerful as they are, as investors "don't have to worry about a political figure" who can "destroy" the value of their money by "just strangling the system." While he considers gold to be an adequate hedge against inflation, for him, BTC is "the clear choice":
"Investors trying to decide whether they should invest in BTC or gold as an inflation hedge should ask themselves if they want utility and freedom with their hedge or an inherited asset."
Karan Sood, CEO and Managing Director of Cboe Vest, an asset management partner at Cboe Global Markets, told Cointelegraph that it is worth noting that Bitcoin's relatively nascent history has "cut both ways in the past" as it has There have been "periods when both Bitcoin and inflation have risen and fallen at the same time."
Sood added that Bitcoin's inherent volatility has the potential to magnify these moves. As an example, he said that if current inflation levels turn out to be transitory and fall from their highs, Bitcoin "can also drop precipitously, exposing investors to significant potential losses."
As a solution, Sood suggested that investors looking to use BTC to hedge against inflation can "benefit from access to Bitcoin exposure through a strategy that seeks to manage the volatility of Bitcoin itself."
Speaking to Cointelegraph, Yuriy Kovalev, CEO and founder of cryptocurrency trading platform Zenfuse, said that while the free fall of the lira could have meant that betting on gold was a good move, for investors based in The US was not:
โGold has underperformed this year, falling 8.6% against the dollar, while the US CPI rose 6.2%. Gold failed investors who bet on it, while BTC is up 92.3% so far this year, rewarding those who believed in it as a hedge. "
Reyes admitted that while Bitcoin offers better returns based on the Sharpe ratio, investors may "want gold in their portfolio for diversification purposes, although it has not performed well this year."
A diversified portfolio may, at least for the most conservative investors, be a more sensible solution to hedge against inflation, as it is not yet clear how the price of Bitcoin will move if inflation continues to rise.
A murky truth
It is unclear if Bitcoin and cryptocurrencies, in general, offer a better solution to the current financial system. For Stephen Stonberg, CEO of cryptocurrency exchange Bittrex Global, "a balanced combination of both systems is what we should be looking for." Stonberg said:
"Both models have advantages, but Bitcoin and the entire digital asset economy must be further integrated into the traditional financial system if we are to reach the unbanked in the world."
Caleb Silver, editor-in-chief of financial information portal Investopedia, told Cointelegraph that the "truth is murky" when it comes to Bitcoin acting as a hedge against inflation.
For silver, Bitcoin is a relatively young asset compared to traditional inflation hedges such as gold or the Japanese yen, and while it has characteristics that are "important ingredients in its perception as an inflation hedge," its wild price swings affect its reliability.
For him, investors must take into account its volatility over the last decade:
โIt has entered 20 different bear markets in the last ten years and has seen a decline of 20% or more for almost 80% of its history. Consumer prices, until the pandemic, have been clearly non-volatile over the last decade. "
Silver added that Bitcoin is a "highly speculative asset" even though institutional investors have been embracing it for more than two years. He concluded by saying that the fact that most market participants do not view Bitcoin as a store of wealth "hurts its credibility as a hedge of inflation."
To hedge against inflation, investors have a host of tools at their disposal, not just Bitcoin. Only time will tell what will and will not work, so a diversified portfolio may be the answer for some investors. The tools at your disposal, according to our experts, include BTC, Gold and even DeFi protocols that help them beat inflation.
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