Are you tired of hearing about inflation? Well, the most recent set of statistics shows that while inflation is slowing, sitting at around 8% today, it's not slowing at the rate expected and is still a long way from where officials want it to be. And as long as inflation remains high, markets will likely struggle as investors look to reduce risk in their portfolios.

First, let's discuss the problem with inflation. When inflation is high, you lose purchasing power. The increased supply of money causes goods and services to cost more. This means you aren't as likely to save as much, and the dominoes then begin to fall from there.

So, what assets are inflation proof or at least inflation resilient? One that might come to mind is Bitcoin (BTC -1.25%), the most valuable cryptocurrency today. It has been touted as a hedge against inflation since it was created in the aftermath of the Great Recession in 2009. Yet, Bitcoin has shed nearly 70% in the last year -- not that great of a hedge it seems.

But as we take a more expansive and in-depth view, we can get a better idea of Bitcoin's potential as an inflation hedge. Before we start, we should look at the characteristics that make Bitcoin so unique, then we can get into the numbers.

It's in the code

First, Bitcoin has a limited supply. Its code is programmed so that there will only ever be 21 million Bitcoin in circulation (about 19 million are in circulation now). Additionally, those 21 million are set to be released on a defined schedule where fewer and fewer Bitcoin enter circulation around every four years. 

This four-year cycle is known as halving. Bitcoin miners earn a reward for successfully "mining" or verifying transactions of the next block on Bitcoin's blockchain. At first, miners earned 50 bitcoins. Roughly four years later that was cut in half to 25 bitcoins. Enough time has passed that miners today earn just 6.25 bitcoins. Sometime in May 2024 when the next halving occurs, that reward will dwindle to 3.125 bitcoins. 

Bitcoin vs. the Fed

This set schedule drives a simple characteristic that Bitcoin advocates believe isn't present in the U.S. dollar: supply and demand. In the last decade or so, the Federal Reserve (the people in charge of America's monetary policy) undertook an experimental approach known as quantitative easing to stimulate the economy. Without getting into the weeds too much, this strategy led the central bank to buy securities like bonds, injecting more money into the economy.

That's the Reader's Digest version of quantitative easing, but we can see its effects by taking a look at the Fed's balance sheet. Balance-sheet expansion started to take place after the Great Recession, but with the onset of the COVID-19 pandemic, the balance sheet grew remarkably fast as the central bank began to purchase more securities. Fed Chairman Jerome Powell said in an interview that the expansion of the balance sheet post-Covid was "substantially larger" than in the wake of the Great Recession. Since 2008, the Fed's balance sheet has ballooned more than 300%, with most of that growth occurring in the past three years.

While some proponents of quantitative easing may have viewed it as a necessary sacrifice to ensure that businesses and families were able to stay afloat through the pandemic, it didn't come without consequences, and it has manifested in the form of inflation. 

Bitcoin moves on, slowly but steadily

Although markets around the world have been spooked by inflation, we can see that even with its recent slump in price, Bitcoin is performing just as it was designed to. More recent Bitcoin investors probably are sitting on losses. But those who invested over the last three, four, five, or even 10 years are sitting on huge gains. And it comes down to one simple dynamic: supply and demand. 

If current trends continue, there should be increased demand for the world's most valuable cryptocurrency. And with limited growth in supply, that price increase should outpace inflation. So yes in the short term, Bitcoin has not been a good hedge against inflation, but when we evaluate over a longer period, that narrative shifts.

To get a better idea, let's look at the price of Bitcoin before the Fed embarked on its most recent round of quantitative easing in the spring of 2020. Bitcoin's price was hovering at around $9,000 at the time; today it's sitting at about $19,000. Go back to 2009 when quantitative easing began and Bitcoin was worth just pennies, and it becomes even more evident that it is capable of outpacing inflation. 

Bitcoin's inherent characteristics help drive its value over the long term. When considering the Fed's recent approach to monetary policy, some of the primary reasons behind Bitcoin's creation become more obvious: to sidestep currency debasement and ensure your hard earned money holds its value.