For years, inflation has been a concern primarily for emerging markets. There, volatile currencies and economic instability made price rises a permanent challenge. However, in the wake of the Covid-19 pandemic, inflation has become a global issue. A stable economy with once historically low inflation suddenly tackled surgent costs, prompting investors to rethink how to maintain their wealth.
Gold and real estate have long been hailed as safe haven assets, but Bitcoin supporters argue that its fixed supply and diversified nature will be the ultimate shield against inflation. But does the theory hold up?
The answer can depend heavily on where you live.
Bitcoin supporters highlight the strict supply limit of 21 million coins as an important advantage in the fight against inflation monetary policy. Unlike Fiat currencies, which central banks can print in unlimited quantities, the supply of Bitcoin is pre-determined by algorithms to prevent any form of artificial expansion. They argue that this rarity makes Bitcoin a more reliable and valuable storage than traditional government-issued money.
Several companies and even sovereign states have embraced the idea, adding bitcoin to the Treasury for hedging against the risks and inflation of Fiat currency. The most notable example is El Salvador, which created a global headline in 2021 when it became the first country to adopt Bitcoin as its fiat currency. The government has since accumulated bitcoin steadily, and has become an important component of its economic strategy. Companies such as US strategy and Japanese Metaplanet are following along, and the US is currently in the process of establishing its own strategic Bitcoin reserve.
Bitcoin Investment Strategy has paid off so far
So far, corporate and government Bitcoin investment strategies have paid off as BTC outperformed S&P 500 and gold futures since the early 2020s, before inflation surged in the US.
However, these days, its strong performance has shown signs of moderation. Bitcoin has been a strong performer for the past 12 months, with BTC profits outweighing consumer inflation, but economists warn that past performance does not guarantee future results. In fact, some studies suggest that the correlation between cryptocurrency returns and changes in inflation expectations is consistent over time.
I’ll be back in the last 12 months. Source: Truflation.
Bitcoin’s role as an inflation hedge remains uncertain
Unlike traditional inflation hedges such as gold, Bitcoin is still a relatively new asset. Its role as a hedge remains uncertain, especially given that widespread adoption has only gained traction in recent years.
Despite the high inflation of recent years, Bitcoin prices fluctuate significantly, and are often more correlated with risky assets like tech stocks than traditional inflation hedges like gold.
A recent study published in the Journal of Economics and Business found that Bitcoin’s ability to hedge inflation has weakened over time, particularly as institutional adoption has grown. In 2022, when US inflation hit a 40-year high, Bitcoin lost more than 60% of its value, but gold, a traditional inflation hedge, was relatively stable.
For this reason, some analysts say that Bitcoin prices can be more driven by investor sentiment and liquidity conditions than macroeconomic basis such as inflation. If you have a strong risk appetite, Bitcoin will collect. But when the market is scary, Bitcoin often crashes along with stocks.
In the Journal of Economics and Business Studies, authors Harold Rodriguez and Jefferson Colombo said.
“Based on monthly data from August 2010 to January 2023, the results show that Bitcoin returns will increase significantly after a positive inflation shock that Bitcoin could act as an inflation hedge.”
However, they pointed out that in the early days when institutional adoption of BTC was less common, Bitcoin’s inflation hedging properties became stronger. Both researchers agreed that “(…) Bitcoin’s inflation hedging properties are context-specific and likely to decrease as they achieve wider adoption and become integrated into mainstream financial markets.”
The first US inflation index since 2020. sauce. Torflation
“So far, it has served as an inflation hedge, but it’s not a black and white case. Abra’s trading manager, Robert Walden, told Cointelegraph.
Walden said,
“For Bitcoin to be a true inflation hedge, it needs to consistently outperform inflation year by year in returns, but its parabolic nature tends to make its performance very asymmetric over time.”
The current Bitcoin movement is more about market positioning than inflation hedging, and more about capital flows and interest rates. ”
Argentina and Turkey are seeking financial shelter in code
In an economy struggling with runaway inflation and strict capital management, Bitcoin has proven to be a valuable tool for maintaining wealth. Argentina and Turkey are two countries with sustained inflation over the last few decades, demonstrating this dynamic well.
Argentina has long been working on repeated financial crises and rising inflation. Although inflation has shown signs of improvement only recently, locals have historically transformed into cryptocurrency as a way to avoid financial restrictions and protect wealth from currency depreciation.
A recent Coinbase survey found that 87% of Argentinians believe that crypto and blockchain technology can increase economic independence.
Related: Argentina overtakes Brazil with crypto influx – chain analysis
With a population of 45 million, Argentina has become a hotbed for the adoption of crypto, with Coinbase reporting that as many as 5 million Argentinians use their digital assets every day.
“Economic freedom is the cornerstone of prosperity and we are proud to bring secure, transparent and reliable cryptographic services to Argentina,” said Fabio Plain, American director at Coinbase.
“For many Argentinians, Crypto is not just an investment, it is necessary to regain control over financial futures.”
“The Argentineans don’t trust the peso,” Julián Colombo, senior director of Bitso, a leading cryptocurrency exchange in Latin America, told Cointelegraph.
“Bitcoin and stubcoin allow us to bypass capital management and protect our savings from devaluation.”
Argentine Inflation Index. sauce. Tolflation.
Beyond individual investors, Argentinean companies use Bitcoin and Stubcoin to protect their revenues and carry out international transactions. Some workers have even chosen to receive a portion of their cryptocurrency salaries to protect revenue from inflation.
According to economist and cryptography analyst Natalia Motil,
“The currency restrictions and capital management imposed in recent years have made access to the US dollar more difficult amid the crisis of high inflation and confidence over the Argentine Peso. In this environment, cryptocurrencies have emerged as a viable alternative to maintaining the value of money, allowing individuals and businesses to avoid restrictions on the traditional financial system.”
The effectiveness of Bitcoin as an inflation hedge is still controversial, but stubcoin has become a more practical solution in a high inflation economy, particularly in an economy that is locked to the US dollar.
Compared to its economy, Turkey has emerged as a hot spot for Stablecoin trading. By March 2024, purchases alone accounted for 4.3% of GDP. The digital currency boom reached 85% in 2022, plunging more than 80% in LIRA over the past five years, fueled by double-digit double-digit inflation, gaining momentum during the pandemic.
Türkiye’s adoption of Bitcoin proves that citizens promote adoption rather than government
Turkey allows citizens to purchase, maintain and trade crypto, but the use of digital currency for payments has been prohibited since 2021, when the central bank of the Republic of Turkey was prohibited from “direct or indirect use of crypto assets in the issuance of payment services and electronic money.” Nevertheless, the adoption of crypto in Turkey is still clear, with the growing number of Turkish banks offering crypto exchange options and ATMs.
High inflation supported the erosion of the Turkish lira value, losing nearly 60% of purchasing power as inflation rates skyrocketed to 85.5% between 2021 and 2023.
While some have argued that the rarity of Bitcoin suggests a long-term valuation, potentially outstripping consumer inflation, its high volatility, and repeated correlations with high tech heavy, risk-related indexes like the recent Nasdaq, it suggests that performance as a pure inflation hedge remains mixed.
However, in inflation-covered countries like Argentina and Turkey, where local currency values are falling apart, “digital gold” undoubtedly serves as an important path to escape from local currency, maintaining purchasing power in ways that traditional Fiat cannot.
Bitcoin is still an early asset and its effectiveness as a hedge requires further research, but one thing is clear. For Bitcoin enthusiasts, that’s enough reason to celebrate.
This article is for general informational purposes and is not intended to be considered legal or investment advice, and should not be done. The views, thoughts and opinions expressed here are the authors alone and do not necessarily reflect or express Cointregraph’s views and opinions.
