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In recent years, inflation has reached levels not seen in decades. During such times, investors often turn to commodities, especially gold, which has a long history as an inflation hedge. More recently, some traders have touted Bitcoin and other cryptocurrencies as alternative ways to hedge against inflation. Is one better than the other?
Here’s the result: Gold beats Bitcoin as an inflation hedge for several reasons. In fact, many experts don’t consider Bitcoin or other cryptocurrencies as an inflation hedge, at least not yet.
What is an inflation hedge?
A hedge is a type of investment that compensates for something else, but the rationale behind a hedge investment can differ depending on what exactly the investor plans to do.
“A hedge can be a correlated but contrarian position in the movement of an asset price or an uncorrelated entity that provides stability during periods of volatility,” says Emily Man, an investor at Primary Ventures, a venture capital firm in New York.
On the former, she points out that airlines buy oil futures as a way to protect future revenues. For the latter definition, Man points to hedge funds that might buy shares of Visa but short-sell rival Mastercard as a means of isolating specific risks and opportunities that impact both companies.
An inflation hedge is therefore an investment that compensates for some or all of the effects of inflation. Perhaps the hedge goes up as inflation rises (offsetting the fall in stocks, for example). Or perhaps the hedge is simply largely resistant to inflation as a factor, providing stability to a portfolio.
Does Bitcoin or gold protect better against inflation?
When comparing Bitcoin and gold as inflation hedges, experts point to a number of dimensions on which to compare them: their history, effectiveness, ease of access, and other sources of demand for the asset itself.
History as an Inflation Hedge – How Bitcoin and Gold Compare
In terms of their history as an inflation hedge, there is little doubt that gold has a strong pedigree, while Bitcoin has only been around for a little over a decade to justify itself.
“Gold has an established history as a determined store of value for thousands of years,” said Fergus Hodgson, director of Econ Americas and roving editor of Gold Newsletter. “Over a longer period of time, this is about the safest inflation hedge you can get.”
Cryptocurrency, on the other hand, is a relative newcomer to global asset markets. Hodgson doubts the long-term viability of the cryptocurrency.
“The future of the company as a store of value is precarious,” he says. “In my opinion, digital currencies and central bank altcoins will challenge Bitcoin’s value proposition as a medium of exchange.”
There is also the potential for the creation of a US central bank digital currency.
Effectiveness as an Inflation Hedge – How Bitcoin and Gold Compare
The lack of longevity raises serious questions about Bitcoin’s ability to be an effective hedge against inflation. Meanwhile, gold has long proven its ability to act as a hedge, many experts say.
“There is basically no historical data on Bitcoin as an inflation hedge,” said Adam Perlaky, senior analyst at the World Gold Council. “There have actually been no periods of high inflation during Bitcoin’s existence. There is no data to support this.”
However, Perlaky emphasizes that the lack of data does not mean that Bitcoin cannot become an inflation hedge, but rather that there has been no demonstration of that potential yet.
In contrast, he says that “there is evidence that gold is an inflation hedge and that it is one of the reasons why investors buy gold” and that gold has done well in periods of high inflation.
Chris Kline, COO and co-founder of Bitcoin IRA, a company that allows individual investors to purchase cryptocurrencies in a self-directed IRA, points to Bitcoin’s potential to act as a defense against money printing by central banks.
“Bitcoin has a finite supply,” he says. “The government has printed unprecedented amounts of money since 2008, and this is starting to have an impact on the wider economy. That manipulation cannot be done in the same way as Bitcoin is limited to just 21 million coins, offering an alternative to the fiat money system.”
“With real estate prices off the charts and gold inaccessible to the average American, crypto has become part of that inflation hedge mix,” says Kline.
But Robert R. Johnson, professor of finance at Creighton University, is more emphatic about Bitcoin’s inability to cover inflation.
“You can’t invest in the wide range of cryptocurrencies, you can only speculate,” says Johnson. “There is no rational way to determine the value of Bitcoin or any of the other various cryptocurrencies, because you cannot apply the tools of traditional finance to arrive at the intrinsic value (or real value) of the supposed asset. ”
Easy Access – How Bitcoin and Gold Compare
Both Bitcoin and gold are relatively easy to buy and dispose of, especially since there are ready markets for both. But gold has an edge because of the more established ways to trade it.
Gold could be relatively easier to invest in given the wide range of ways to do so, including buying physical gold, buying ETFs that own physical gold or gold companies, and trading futures. Investors have a number of ways to express interest in gold, depending on what their intention is. Many of these methods involve exchange-traded products such as stocks and ETFs, making it easy and inexpensive for investors to access their investments.
However, for those looking to purchase physical gold, Bitcoin IRAs Kline warns of the “storage, shipping, and security logistics requirements” that come with these types of gold investments.
Traders can buy Bitcoin through crypto exchanges and now through traditional brokers, if they don’t mind the broker having custody of the cryptocurrency. Those who insist on taking custody of their coins will want to work through an exchange or intermediary that makes this possible.
In early 2024, the Securities and Exchange Commission approved the applications of several spot Bitcoin ETFs, giving traders a simple way to buy and sell the cryptocurrency using a familiar structure. The funds have attracted billions in assets in the first few months of trading.
In terms of costs, Bitcoin can sometimes be cheaper. Traders can pay one-time commissions to own Bitcoin. Those who purchase gold ETFs, on the other hand, may not pay a commission, but pay an ongoing expense ratio that is a percentage of the total investment. So if these types of gold investments are held long enough, it can cost more than the Bitcoin commission, depending on exactly how much that commission costs. However, regular trading can cause commissions to add up quickly.
Other sources of demand for Bitcoin and gold
Those looking to use Bitcoin or gold as an inflation hedge must also understand other sources of demand that can support the prices of these assets.
Gold has many uses, including industrial and electronic applications, jewelry, medical applications and of course it is often purchased by central banks as a store of value.
“Understanding trends beyond investments is important because the multifaceted nature of demand is a unique characteristic of gold and a key reason why it is an effective strategic component of portfolios,” says Perlaky of the World Gold Council.
Bitcoin’s usefulness, on the other hand, is based entirely on its ability to be traded for other things, including traditional currencies. So if Bitcoin can’t be used to buy things or people can’t trade it with others who value Bitcoin this way, it’s effectively worthless.
“Bitcoin is a purely speculative asset with limited power as a medium of exchange,” says Johnson of Creighton University.
“Bitcoin has enjoyed a first mover advantage among cryptocurrencies, but its adoption is weak,” said Hodgson of Econ Americas. “Its intrinsic value would lie in its convenience as a medium of exchange, but even proponents are now shying away from claiming that and are trying to label it as digital gold.”
In short
While gold may be a better hedge against inflation than Bitcoin, can traders at least use Bitcoin as a hedge against a volatile stock market? Even that seems questionable.
“We have historical evidence on how cryptos have behaved during systemic market sell-offs,” says Perlaky. Crypto behaves more like a risky asset, more like technology stocks or momentum stocks.
That kind of correlation makes Bitcoin a poor hedge for stocks so far.
