Investing in Bitcoin: An Ineffective Hedge Against Inflation?

The belief that buying Bitcoin protects against inflation is often questioned when the price cuts sharply during periods of high inflation. Critics argue that the relationship between Bitcoin and inflation is not as simple as it seems. To clarify, let's dissect this complex issue by examining the logic behind these viewpoints.

Why Bitcoin Is Considered a Hedge Against Inflation

Some proponents of Bitcoin argue that it is an effective hedge against inflation. These arguments are based on several key points:

Four-Year Cycles: Bitcoin exhibits a four-year cycle in its price. One must compare the current price to its price four years ago, not its most recent all-time high, for a fair comparison. 200-Week Simple Moving Average (200 WSMA): The 200 WSMA is considered the best measure of value over time for Bitcoin. Finite Supply: Bitcoin has a fixed supply, capped at 21 million coins. This finite supply contrasts with the arbitrary increase in money supply by central banks, which leads to inflation.

The Reality Check: Bitcoin's Relationship with Inflation

However, recent events and historical data paint a different picture. Historically, Bitcoin’s value has not consistently held up during periods of high inflation. A specific example shows that Bitcoin’s value plummeted when inflation rates were at their peak. This suggests that Bitcoin may not be as effective as a hedge against inflation as some proponents claim.

Comparison with Gold

Gold, on the other hand, has long been recognized as a reliable hedge against inflation. According to Adam Perlaky, senior analyst at the World Gold Council, the lack of historical data on Bitcoin as an inflation hedge does not definitively rule it out as a potential hedge; however, there is no evidence to support its effectiveness yet. Perlaky posits that:

“There’s really no historical data on Bitcoin as an inflation hedge. There’s effectively been no periods of high inflation during Bitcoin’s existence. There’s no data to back it up.”

Gold’s track record is much clearer. Chris Kline, COO and co-founder of Bitcoin IRA, highlights:

“Bitcoin has a finite supply. The government has been printing unprecedented amounts of money since 2008 and it is starting to have an impact on the wider economy. That manipulation cannot be manufactured in the same way since Bitcoin is limited to only 21 million coins providing an alternative to the fiat money system.”

Despite Kline’s points, real-world data does not fully support Bitcoin as a robust inflation hedge. Real estate prices have skyrocketed in many markets, and gold has become more accessible. As a result, cryptocurrencies like Bitcoin have started to emerge as part of the broader inflationary hedge mix.

Expert Opinions

Robert R. Johnson, Professor of Finance at Creighton University, is even more critical of Bitcoin as an inflation hedge. He argues:

“One cannot invest in the wide array of cryptocurrencies one can only speculate. There is no rational way to determine the value of Bitcoin or any of the other various cryptocurrencies as one can’t apply the tools of traditional finance to arrive at the intrinsic value or true value of the supposed asset.”

This statement underscores the speculative nature of cryptocurrencies, which can make them an unreliable hedge against inflation.

Conclusion

While Bitcoin and other cryptocurrencies may offer some unique attributes, such as a finite supply and decentralization from traditional financial systems, the evidence suggests that they are not as effective as a hedge against inflation as some might believe. Traditional assets like gold still stand out as a tested mechanism for protecting against inflation, driven by their proven track record over centuries.

Investors should be cautious and thoroughly research any potential hedge against inflation, ensuring they understand the underlying mechanics and historical performance before making any investment decisions.