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Bitcoin May Not be the Inflation Hedge You Think It Is

  • While many Bitcoin maximalists are touting the inflation hedging properties of Bitcoin, the empirical evidence is too patchy to demonstrate any clear property for the nascent asset class to do so
  • Recent spike in U.S. Treasury yields followed by a sharp selldown in Bitcoin suggests that at its core, Bitcoin remains highly speculative

Ask any newbie bettor on Bitcoin why they bought into the nascent asset class and nine out of ten will tell you as a “hedge against inflation” and perhaps even throw in a “guard against currency debasement” argument for good measure.

And while these soundbites are sexy in their simplicity, the reality is that the empirical evidence backing up Bitcoin as an inflation hedge is patchy at best and fabricated at worst.

The inflation narrative for Bitcoin goes something like this — unlike dollars or any other fiat currency, the supply of Bitcoin is limited, so it can’t be devalued by a government or central bank by overdistributing it.

And with fresh stimulus checks headed into American pocket books, the seductive simplicity of the allure of Bitcoin is understandable.

As U.S. Treasury yields have spiked because of longer term inflation concerns, Bitcoin maximalists are pointing to that, to talk up their favorite cryptocurrency.

But in reality, inflation is coming off a very low base — just 1.7% over the past year in the United States.

And even if we were to forget about what the actual inflation rate is, the bigger question is whether Bitcoin would work as a hedge against it.

First off, there’s the relatively limited history of Bitcoin, which has only been around for over a decade — a period during which inflation has been historically low.

And if Bitcoin is likened to gold then the good news is that gold does act as an inflation hedge, if you think in time frames of beyond a century or more.

But over relatively shorter periods, gold is susceptible to both bouts of euphoria and sharp crashes (sound familiar?).

For reference, gold is down almost 10% this year, despite Treasury yields spiking and concerns over inflation.

If nothing else, inflation might see a sharp decline in Bitcoin, if investors move out of riskier assets such as cryptocurrencies.

In recent weeks, as U.S. Treasury yields spiked on inflation concerns, Bitcoin saw its worst falls in months.

That doesn’t of course mean that Bitcoin can’t be a hedge against inflation — because an asset sometimes is what you make of it.

A growing chorus of high profile voices from Wall Street and the Silicon Valley are talking up the inflation-proof quality of Bitcoin and celebrities are also getting in on the asset class.

And there is a growing list of global macro investors who have a non-zero amount stashed away in Bitcoin as a store of value, led most notably by billionaire hedge fund investor Paul Tudor Jones.

Ultimately, Bitcoin could or could not be a hedge against inflation, but the odds are the answer to that question would depend very much on who you are asking and more importantly, when you are asking that question.

Empirically however, Bitcoin’s value as an inflation hedge is less certain, and you can bet your last Satoshi on that.

What can Digital Assets do for you?

While markets are expected to continue to be volatile, Novum Alpha’s quantitative digital asset trading strategies have done well and proved resilient.

Using our proprietary deep learning and machine learning tools that actively filter out signal noise, our market agnostic approach provides one of the most sensible ways to participate in the nascent digital asset sector.

If this is something of interest to you, or if you’d like to know how digital assets can fundamentally improve your portfolio, please feel free to reach out to me by clicking here.

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Phuong Nguyen

Phuong Nguyen

Business Development of Novum Alpha, a leading quantitative cryptocurrency trading firm that specializes in Managed Account and DeFi products