Bitcoin came into being in 2019 solely as a ‘hedger’ against financial crisis. It was designed in a matter that it could overcome issues generated as a result of weak monetary policies. Ten years later, Bitcoin became a hedge against inflation as well. It reiterates the viewpoint of Bitcoin’s creator, Satoshi Nakamoto, who had said that an increase in Bitcoin supply would never inculcate inflation.
Bitcoin’s total supply has been restricted to a certain number i.e. 21 million. The supply would neither be less nor above this 21 million Bitcoins for sure. It is expected that this limit will be fulfilled by 2140, as the case may be. When the supply would reach its maximum, then any inflation rate for Bitcoin will be eliminated completely. On the contrary, printed notes’ supply is unlimited and they can even be printed for overcoming a crisis by adjusting policies.
While the world is facing another financial crisis brought by a pandemic, crypto as a “hedge against inflation”, the argument is getting stronger. However, the other argument which suggests crypto as a hedge against inflation is becoming slightly weaker. It is the aspect of high volatility in cryptocurrencies that is raising doubts over the ‘crypto as inflation hedge’ argument. There have been several upside downs that have taken place in the crypto economy since digital currency’s inception. At several times, the impacts were catastrophic reducing the values by more than 50%. Resultantly, even the viability of Bitcoin as a hedge against inflation has been put into doubt. Otherwise, acclaimed strategists such as JPMorgan and individuals like Carl Icahn were insisting that investors should invest 1% of their portfolios into Bitcoin. These strategists further believed that Bitcoin provides a hedge against inflation.
Now the strategists are going another way around. They are suggesting that Decentralized Finance (DeFi) could be an alternative to Bitcoin as a hedge against inflation.
Against gold, Bitcoin is simply outperforming centuries-old hedgers. Since January 2021, Bitcoin’s value has surged by more than 94% against gold. In contrast, thereto, the value of gold has in fact dropped by at least 8% within the same time.
If the 2021 values surges for both, Bitcoin and Gold, are compared with each other against fiat currencies then it is Bitcoin that will emerge as the winner. Against fiat currency such as USD, Bitcoin’s value surged by 270% in 2021. For the same period, Gold’s value has increased by 70% only against USD.
So the initial argument becomes stronger that when there are crises such as financial crisis or pandemics, even the best assets would fail as hedges. On the contrary, when there is a crisis of finances and economy, then cryptocurrencies, particularly Bitcoin, provide better hedging options than gold. Similarly, using cryptocurrencies as a hedge against inflation seems quite right, and already many investors have adopted this.