As the price of Bitcoin (BTC -2.99%) soars to new heights, inflation is also increasing at record rates.
Bitcoin reached an all-time high of more than $68,000 per token recently, up nearly 300% over the past year. Meanwhile, in October the consumer price index (CPI) rose by 6.2% from one year ago, its highest in more than 30 years.
Some experts believe Bitcoin's recent rally is related to the increase in inflation, as Bitcoin has often been referred to as "digital gold" because of its potential to be an inflation hedge. But can the cryptocurrency really be an effective hedge against inflation? It depends.
Image source: Getty Images.
Bitcoin's potential as an inflation hedge
One of Bitcoin's most significant advantages over other cryptocurrencies -- and even fiat currencies such as the U.S. dollar -- is that it's said to hedge against inflation over time.
Unlike other currencies, there is a limited supply of Bitcoin tokens. There will only ever be 21 million tokens in circulation, and according to current estimates, we should reach that cap around the year 2140. Because there's a finite supply of tokens, that should, theoretically, help Bitcoin retain its value over time.
Traditionally, gold has been considered the strongest inflation hedge. The supply of gold remains relatively steady over time, and gold tends to have an inverse relation with inflation -- as inflation increases and the U.S. dollar loses buying power, the value of gold tends to increase.
However, as inflation has surged over the past year, gold has underperformed. While everything from housing prices to gasoline to energy costs have soared, the price of gold has decreased over the past 12 months.
Gold Price in US Dollars data by YCharts
Bitcoin, though, has seen its price continue increasing as inflation climbs higher and higher. It appears, then, that Bitcoin might be a more effective inflation hedge than gold. That said, there are other factors to consider that could affect Bitcoin's long-term inflation hedge potential.
How will Bitcoin fare over the long run?
Although Bitcoin has had a phenomenal year and has managed to hedge against inflation in recent months, it's too soon to say how it will fare over decades.
Bitcoin has only existed since 2009, while gold has been valuable for centuries. With such a short track record, it's tough to tell whether Bitcoin will have the same staying power as gold.
In addition, while gold is widely accepted as an inflation hedge, many people are still skeptical about Bitcoin in general. Not everyone believes in its potential, and it's still a speculative investment at this point. If the general public is unwilling to accept Bitcoin (or cryptocurrency in general), it likely won't survive over the long term.
Bitcoin is also extremely volatile, which could affect its potential as an inflation hedge. There are many factors besides inflation that can impact the price of Bitcoin, and there may be several forces at play when it comes to its recent price increase.
In short, nobody knows for certain how Bitcoin will perform as an inflation hedge over time. While it does seem promising right now, only time will tell whether it continues performing well over the long run.
