There has been a lot of hype that Bitcoin (BTC -0.73%) could be a hedge against inflation, largely due to its finite supply of 21 million tokens. Many investors have gone so far as to call the world's largest cryptocurrency "digital gold," and analysts at JPMorgan Chase attributed Bitcoin's run last October mainly to people buying Bitcoin as an inflation hedge. Since then, Bitcoin and the broader crypto market have not held up well in the face of rising prices for goods and services, and an acknowledgment from the Federal Reserve that inflation is not "transitory." Will Bitcoin ever be a true hedge against inflation? Let's take a look.
Bitcoin has fared no better than tech stocks
Concerns about rising and more enduring inflation crept into the market throughout the second half of 2021, as the prices of many daily goods surged. But it was in November -- when the Fed solidified its plans to wind down its billions of additional monthly bond purchases it began at the pandemic's onset -- that the market started to turn.
The market really got hammered after the Fed said last month that it would start raising its overnight benchmark lending rate in March, and that it would raise the federal funds rate several times this year while perhaps shrinking its balance sheet. Tech and growth stocks took a beating, and Bitcoin and the broader crypto market did worse in general.
Bitcoin Price data by YCharts.
As you can see, various benchmarks for gold have been little changed since November -- the Nasdaq Composite had been in correction territory -- while Bitcoin has fared much worse and more like Cathie Wood's Ark Innovation ETF, which is full of high-growth tech stocks.
So, what gives? Well, as the World Gold Council's senior research analyst Adam Perlaky points out, investors associate Bitcoin with gold because both have scarcity. But one thing to consider is that both also currently serve vastly different purposes. Gold is not just an investment but rather a good that's used heavily in the jewelry and tech industries. Demand for jewelry rebounded in 2021 and rose 52%, according to the 2022 World Gold Council report.
Meanwhile, how many people do you know who use Bitcoin for anything other than investment? Think about it: Do you know many people who use Bitcoin for commerce and remittance? I think we are still early on this aspect of the token.
"Cryptos have yet to become an established medium of exchange, partially as the extreme volatility, at times, erodes purchasing power in a short period of time," Parlaky told GOBankingRates.
Image source: Getty Images.
Will Bitcoin ever hedge inflation?
Right now, it really depends on whom you ask whether Bitcoin is a hedge against inflation. Some experts would say yes, while others would say no. However, one thing is certain: Perception, particularly among younger investors like millennials, is certainly rising that Bitcoin can hedge inflation. Jeremy Siegel, a finance professor at the Wharton Business School of the University of Pennsylvania, told CNBC last month that "it's a fact that the young generation is regarding bitcoin as the substitute [for gold]."
But Bitcoin is still extremely volatile and largely seen as an investment, making it hard to trust in any market environment. Ultimately, while Bitcoin certainly does have some of the characteristics, I think it's impossible to know for sure right now whether it can actually hedge inflation.
