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Is Bitcoin a Good Inflation Hedge?
Bitcoin is used to hedge against inflation for various reasons, but this article will focus on the following three:
- Bitcoin is a Hard-Money Asset
- Bitcoin is Disinflationary
- Bitcoin’s Monetary Policy
While each of these is related to some degree, it’s worth analyzing them individually.
Bitcoin is a Hard-Money Asset
Bitcoin is a hard-money asset, meaning that it is difficult to create more of, and therefore its existing value cannot be inflated away by unpredictable new increases in its supply.
People looking to preserve their purchasing power during inflationary periods commonly turn to hard-money assets.
Before bitcoin was an option, they traditionally allocated to precious metals such as gold, silver, and platinum, or real estate, in an attempt to store their existing purchasing power.
These scarce assets have high stock-to-flow ratios, where stock is the asset’s existing supply, and flow is its annual production.
An asset with a high S2F ratio suggests it may be an effective store-of-value.
It’s very easy to create more dollars, and thus it has a low S2F ratio and is not a hard-money asset.
However, increasing the supply of gold requires large-scale mining operations and enormous amounts of energy.
Same with real estate – there’s only so much available land in areas where people want to live, and only so many new houses can be created each year.
Bitcoin shares these scarcity characteristics, but in the digital space. It follows a predetermined issuance schedule regardless of how much energy is exerted to create more.
These supply-side qualities make bitcoin an effective inflation hedge, in theory, if there’s enough demand in the market.
Bitcoin is Disinflationary
Bitcoin is a disinflationary asset, meaning that its inflation rate decreases over time.
Bitcoin’s supply rate is halved every four years. The current halving era issues 6.25 BTC every 10 minutes; the next will call for 3.125 BTC, then 1.5625, and so on.
It becomes exponentially more scarce with each subsequent halving. The image below charts Bitcoin’s disinflationary monetary policy:
Bitcoin’s current inflation rate is around 1.88%, compared to double-digit inflation prints from several fiat currencies.
Additionally, bitcoin’s inflation rate is predictable. In 2024-2028, it will have an inflation rate of around 0.90%. Between 2028-2032, it will be approximately 0.45%.
What will the Euro’s inflation look like in 2029? How about even a year from now? We have no idea.
Buying bitcoin is hedging against an inflationary asset with a disinflationary asset.
Bitcoin’s Immutable Monetary Policy
Saving in bitcoin is a way of opting out of the money printing that erodes the purchasing power of fiat currencies.
The dollar’s monetary policy is subject to the discretion of central bankers and policymakers who continue to kick the can down the road instead of addressing their decisions that created and continue to feed the problem.
Using bitcoin to hedge against inflation is a bet that policymakers will continue to print money and devalue their currency.
Bitcoin’s monetary policy is not vulnerable to these erratic changes that subject centrally planned fiat currencies.
Bitcoin’s supply schedule is unchangeable. Regardless of what’s going on globally, 900 new BTC will enter the supply today. Another 900 tomorrow, and so on.
This supply-side certainty and transparency are unlike any asset in history.
Current Bitcoin holders are not vulnerable to random changes in their monetary policy.
They could see exactly how many BTC was in circulation, how many new BTC would enter the supply today, and how many BTC were left to issue when they bought them.
So, how does this relate to inflation? The chart below shows what happens to the purchasing power of a currency that lacks sound-money properties versus one that embraces them:
Bitcoin’s fixed monetary policy enables it to preserve and grow its purchasing power, whereas the dollar’s monetary policy infinitely erodes its purchasing power.
An infinite amount of dollars can be created, but there will only ever be 21 million BTC.
Understanding Bitcoin & Inflation
Given its volatility, bitcoin is viewed as a risk-on asset for institutions that trade it.
Therefore, we don’t expect it to be treated like a safe-haven asset following a high CPI print (yet).
Risk-off assets may spike in the short-term following a high CPI as investors react to a changing market.
The other end of that equation is a sell-off in more risky assets, such as tech stocks.
Bitcoin is viewed as a risky asset and will be treated that way for some time, meaning it will probably be included in these risky asset sell-offs.
That may seem counterintuitive given everything we’ve discussed thus far, but we are evaluating bitcoin as an inflation hedge on a multi-year, multi-decade timeline.
Bitcoin is still a very new and small asset. It is monetizing in real-time and vulnerable to significant swings in its USD price for many reasons.
Bitcoin is not one thing. It is not only a hedge against inflation. It is a global payments system. It is a network of tens of thousands of computers. It is digital property.
It is many things, and it is traded as such.
Bitcoin as an Inflationary Hedge: Frequently Asked Questions
Why is Bitcoin dropping if it’s an “inflation hedge”?
Given bitcoin’s volatility, many consider it a risk-on asset, and therefore it is traded as such when the macro environment changes. Higher-risk assets like tech stocks, for example, tend to sell off during inflationary periods because their earnings are far off in the future.
Is Bitcoin a better inflation hedge than gold?
Investors commonly turn to scarce assets when the dollar’s purchasing power weakens, and bitcoin shares many of the same hard-money characteristics that attract people towards gold during these times. Bitcoin is a better inflation hedge than gold if you’re comfortable with the idea of digital scarcity. Gold has been the traditional hedge against inflation, but it’s yielded negative returns in the most inflationary environment in the last 40 years. Bitcoin is up +100% over the same period.
Bottom Line: Is Bitcoin a Good Inflation Hedge?
Bitcoin has absolute scarcity – that’s a good property to have in an inflationary environment.
- What is Proof of Work?
- When is the Next Halving?
- What is Bitcoin Backed By?
- How Many Satoshis are in a Bitcoin?
This article is for informational purposes only. It is not intended to be investment advice.