Over 40% of Survey Participants Consider Bitcoin a Good Inflation Hedge
What is crypto’s role in hedging against inflation?
This research was sponsored by Luno, a platform that allows users to buy, save and manage cryptocurrencies.
With inflation reaching multi-decade highs in many countries, the idea of using bitcoin to hedge against increases in the price level has grown in popularity. In fact, a recent survey conducted by 3Gem showed that over 40% of participants considered bitcoin — the largest of all digital currencies by market cap — a good hedge against inflation.
3Gem’s polling covered a broad sampling of the public across the social spectrum in the U.K. — evenly spread out in terms of age, gender and location. Of the more than 40% that considered bitcoin to be an effective hedge against inflation,10.5% strongly agreed with the statement, while the remainder simply agreed. Meanwhile, over 20% of respondents disagreed.
What is Inflation?
When the prices of goods and services increase and this leads to reduced purchasing power, that is considered inflation. Due to this, more currency units are needed to purchase an item.
According to the Bank of England, the annual Consumer Prices Index including owner occupiers’ housing costs, or the CPIH, rose 6.2% through March 2022. Using a real-world example, if the price of a loaf of bread was £3 last year, this year, the cost now is £3.19. In isolation, these figures don’t seem like much, but when combined for all everyday living costs they can become substantial.
In March, U.K. inflation was at its highest rate since February of 1992.
Why Does Inflation Happen?
There are several factors that can cause inflation, although a certain level of inflation is considered healthy — the BOE’s preferred rate is 2% annually.
If the money supply, meaning all money in circulation, grows more quickly than society can produce goods and services, prices could increase, causing inflation. This could take place if central banks print substantial amounts of money to provide stimulus.
Further, if consumers’ demand for a good or service exceeds society’s ability to produce that item or service, it can place upward pressure on the price, something known as demand-pull inflation.
Then there is cost-push inflation, which takes place when the cost of inputs climbs, resulting in higher end costs for consumers. For example, if energy expenses rise, it increases the cost of producing different goods. Another example is wages. If workers start demanding greater compensation, this also makes it more expensive to create goods.
Around the world, measures of inflation have been hitting multi-decade highs after governments doled out trillions of dollars’ worth of stimulus in response to the COVID-19 pandemic.
To combat inflation, governments will use monetary policy, with their primary tool being hiking benchmark interest rates. In turn, higher interest rates raise the cost of borrowing, increase business expenses and therefore discourage spending. As spending decreases, demand is lowered, and theoretically, prices should also decrease.
What is an Inflation Hedge?
To counteract the eroding power of inflation on investments, many investors will turn to assets that are considered a hedge against inflation. According to Investopedia:
“An inflation hedge is an investment that is considered to protect the decreased purchasing power of a currency that results from the loss of its value due to rising prices either macro-economically or due to inflation.”
Many consider gold an effective hedge against inflation due to the metal’s limited quantity and relative liquidity. Investors will sometimes look to gold to compensate for the eroding value of a currency in a diversified portfolio.
But even gold has had its limitations. While the cost of living tripled from 1980 to 2005, the price of gold was worth less in 2005 than it was in 1980.
Bitcoin as an inflation hedge
Several of bitcoin’s common qualities with gold — scarcity and decentralization — contribute to its role as an effective hedge against inflation.
With a hard cap of 21 million coins, the majority of bitcoin has already been mined. This scarcity sets it apart from fiat currencies, which can be printed on demand by central governments. And like gold, bitcoin is decentralized, since it operates without a centralized authority.
Having a fixed supply means that the price of bitcoin fluctuates based on demand — higher demand equals a higher price. The difficulty of mining bitcoin increases every four years when the coin’s supply is “halved” — the event reduces the rate of new supply by 50%, further restricting the amount being mined and encouraging investors to hold or HODL.
Bitcoin’s future role
Has bitcoin been successful as an inflation hedge? The times that it fell in value while consumer prices rose seem to indicate it has not. Yet, as bitcoin sees increasing adoption, its role as both a currency and an investment vehicle grows.
As a store of value, bitcoin continues to benefit the unbanked and underserved countries. In addition to El Salvador, the Central African Republic just adopted the coin as the country’s official tender. Both countries suffer from extreme poverty and political instability.
And its role as a portfolio diversifier is also growing. The survey by 3Gem asked participants their opinion of whether bitcoin is “a good way to diversify” a portfolio, and over 20% agreed with the statement.
Adoption by institutional investors is also increasing. An analyst from leading investment bank Goldman Sachs Group, Inc. recently stated that bitcoin will “most likely” capture a growing share of the “store of value” market this year, causing the digital currency’s price to increase.
And inflation is not going away. Earlier this month, the BOE warned that they “expect inflation to rise further to around 10% this year.”
Bitcoin’s limited supply, decentralization and blockchain technology will continue to help the currency function as a store of value and an inflation hedge.
This content is for educational purposes only. It does not constitute trading advice. Past performance does not indicate future results. Do not invest more than you can afford to lose. The author of this article may hold assets mentioned in the piece.
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