Is Bitcoin really an inflation hedge?
Recent price action across major cryptocurrencies, including Bitcoin and Ethereum, is putting that theory into question. Since early November, these crypto bellwethers have each fallen by more than 30%.
At the same time, inflation has climbed to its highest level in nearly 40 years. Bitcoin is often referred to as an inflation hedge because of its fixed supply and above average annual returns. However, crypto’s volatility, nascent history and undefined future may be at odds with this simplistic view.
The crypto slide started in November when inflation readings reached levels not seen since the ‘90s. On November 8, two days before October inflation was reported, Bitcoin reached its most recent peak of $67,500 (on a closing basis). By that time, inflation, as measured by Consumer Price Index (CPI), was running above 5% for more than five months. Cryptocurrencies weren’t around the last time inflation was above 5% and many crypto investors might not have been either.
At 7%, CPI is running hot to say the least. Yet crypto’s decline has continued.
There is some merit to the idea that Bitcoin could be a hedge against inflation. Having fixed supply makes it like gold, a traditional inflation hedge. It’s similarly priced in dollars. It’s not a surprise that the correlation between Bitcoin and inflation is strong. But the history of crypto’s relationship with inflation has been limited. It doesn’t include the ‘70s and ‘80s when double digit inflation was common. Gold earned its title of inflation hedge then.
Bitcoin and other cryptocurrencies have become famous for their big price swings. That type of action can make the asset class less reliable as a hedge. While Bitcoin has been around since 2009, crypto is in the early stages of adoption by consumers, retailers and the financial system. That can be exciting in the long-term but can add to volatility near-term.
Plus, unknown risks are not a typical characteristic of safe havens in inflationary environments. And crypto has plenty. Not the least of which is global regulatory uncertainty.
The S&P 500 is sometimes cited as a hedge of inflation because its average annual return has steadily outpaced inflation in the past. Bitcoin was actually correlated to the performance of the S&P 500 over the past 5 years, but that relationship broke down recently as Bitcoin has increased in popularity and its volatility has outpaced the index.
The Bottom Line
While the weakness in crypto over the past couple months may not be completely related to the rise in inflation, it seems as though that may be a contributing factor in the recent slide. Right now, crypto isn’t living up to the inflation hedge hype.
There are still plenty of reasons to educate yourself about cryptocurrencies and maybe even dip your toes into the water with a Bitcoin ETF or a stock that participates in the development of the blockchain ecosystem.
The latest move in Bitcoin should be viewed as a reminder that the market for crypto is volatile in both directions.
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Lindsey Bell, Ally’s chief markets & money strategist, is an award-winning investment professional with a passion for personal finance and more than 17 years of Wall Street experience. Bell’s unique ability to connect the dots between data and real life and craft bite-sized money ideas that people can use and apply stems from her deep background as an analyst, researcher and portfolio manager at organizations including J.P. Morgan and Deutsche Bank. She is known for demonstrating why and how an understanding of all things money improves a person’s finances and overall well-being. An ongoing CNBC contributor, Bell empowers consumers and investors across all walks of life and frequently shares her insights with the Wall Street Journal, Barron’s, Kiplinger’s, Forbes and Business Insider. She also serves on the board of Better Investing, a non-profit focused on investment education.
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Comment on this article
C.Russo on January 14, 2022 at 3:09pm
An informative article that should go further into mentioning the crypto currency and blockchain funds that are available to investors. Thank you
Vincent on January 14, 2022 at 8:30pm
Great article that exposes Bitcoin s weakness.
Philip L. on January 14, 2022 at 8:42pm
This article is so far from the truth. The data points chosen such as November of last year, for an article that comes out in January of 2022 is upsetting. Look at January of 2021 and take a look at BTCs chart. BTC, Harmony ONE, and ETH have not only been better than inflation they have produced life changing wealth for many and produced many more millionaires our of people who normally don’t have a chance to participate in the financial market “Wall Street” has to offer. Like it or not Wall Street has a lot of red tape for normal investors and doesn’t give the average Joe a shot at anything significant. Blockchain is a Jew internet, and threatens the stock market and central banking system globally. Let’s evolve please and educate people so we don’t end up creating a wider wealth gap where the rich get richer and the poor get poorer. In example I sold 100% of my ALLY Invest stock portfolio (16k down from 20k) put it in some diversified DeFi crypto plays and within 2 m
DeFi K. on January 14, 2022 at 8:43pm
This article is so far from the truth. The data points chosen such as November of last year, for an article that comes out in January of 2022 is upsetting. Look at January of 2021 and take a look at BTCs chart. BTC, Harmony ONE, and ETH have not only been better than inflation they have produced life changing wealth for many and produced many more millionaires out of people who normally don’t have a chance to participate in the financial market “Wall Street” has to offer. Like it or not Wall Street has a lot of red tape for normal investors and doesn’t give the average Joe a shot at anything significant. Blockchain is a NEW internet, and threatens the stock market and central banking system globally. Let’s evolve please and educate people so we don’t end up creating a wider wealth gap where the rich get richer and the poor get poorer. In example I sold 100% of my ALLY Invest stock portfolio (16k down from 20k) put it in some diversified DeFi crypto plays and within 2 m
Vic on January 14, 2022 at 9:00pm
Correlation may not be causation. Just because the two are following similar patterns this time doesn’t mean it will at others.
Stanley K. on January 15, 2022 at 4:28pm
Your article zero's in on bitcoin performance since November, but looking annually in January 2021, was running about $30,000; then climbed to all time high above $67,000. Meanwhile gold remained stagnant around $1800 per ounce. Gold has not performed well in last decade, compared to Bitcoin meteoric rise. Now with institutional adoption of Bitcoin, and several countries adopting Bitcoin as currency, the future of Bitcoin looks promising. Currently Bitcoin seems to be finding support around $42,000; makes it a perfect investing opportunity. Though Bitcoin is not for weak investors, volatility is part of daily life, you must not be a person who is subjected to panic selling, but if you are a strong willed believer, I believe the future payoff will outpace any investment ever made. Remember it's your money, your decision, your responsibility.