Gold is often considered as the best mainstream asset class to hedge against inflation, but recent research studies show that it hasn’t lived up to its hype. It not only failed to generate variable interest, but it also underperformed during this crisis, making it an unreliable asset, at least in the short term. Bitcoin, on the other hand, is looking more promising to be the next big ‘anti-fiat’ asset. It is proving to be superior in every aspect of fulfilling the inflation hedge role.
To support bitcoin’s maturation over the years, let us see how it performed under multiple periods of inflation and in some cases- unexpected inflation. In the below tracker, we can see the correlation between bitcoin price and inflation. Since its inception, the relationship between bitcoin and inflation is far more superior compared to inflation and gold.
In the same sense, let us look at gold during inflationary periods. We can see that gold has a mixed track record during periods of high inflation. This only indicates to us that investing in gold to fight against inflation is a straight-up gamble.
While gold still holds value as a hedging instrument and it can be an option to mitigate long-term risk, it still is not a reliable asset to overcome a potential inflationary problem, considering the current global economic crisis. The producer prices are soaring high right now, and at 7.1% for the developed world, we are now in the 90th percentile of historical figures, which also directly largely affects the consumers.
On top of the commodity price spike, we are seeing unemployment falling at a faster rate than in the 08’ financial crisis. Although the wages are up now, they will go down once the workers get back to work. This only creates more challenges to overcome short-term inflation and avoid being exposed to long-term inflationary problems.
In contrast, bitcoin keeps exceeding the expectations of many investors, despite having to face similar circumstances like gold in the marketplace. Another correlation for bitcoin is with bonds. As the yields tend to rise, we are seeing bitcoin also move with the same movement. This means, bitcoin is positively reacting to the belief that inflation is coming. Here is bitcoin’s performance against unexpected inflation:
Source- CoinShares
Some speculators and conservative investors may point out bitcoin’s small sample size to vote against it when it comes to choosing an asset for mitigating inflation risks. Bitcoin proved them wrong in the recent FOMC statement (16th June), in which it behaved as an asset that appreciates as the value of the US dollar goes down.
Even the demographic trends show us that millennial participation in assets like bitcoin is consistently increasing over the last few years, whereas gold is limited to only 7.5%. That figure for bitcoin stands at 25% and above.
If we consider the physical liabilities of gold, the list goes on and on. The supply keeps increasing at a rate of about 1.25%. It is expensive to store, and transfer. None of this can be applied to bitcoin, making it the gold disrupter sooner than we think.
The rise in popularity of cryptocurrencies is not going down any time soon and the increase in functionality of bitcoin networks is bringing in more users, raising the value even higher. Unlike gold, bitcoin can function as an asset, to serve as a payments network. That is why it records a new safe haven top spot and is the best shot at overcoming inflation, and possibly avoiding financial instability.
Born and brought up in India, Karthikeya Gutta is a crypto journalist and freelance contributor for ItsBlockchain. He covers various aspects of the industry with in-depth analysis and research. His passion towards blockchain and crypto ecosystem is mainly because he believes it can really change the world and help millions of people.
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