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Precious Metals & Inflation
January 13, 2021

Is Bitcoin a Better Hedge Against Inflation than Gold?

Despite the 'greatest ever expansion' of the money supply in 2020, which followed the previously 'greatest ever expansion' of the money supply from 2009 to 2015, I argue that none of this is likely to cause hyperinflation in the US and a massive devaluation of the dollar. Because of this, justifying BTC-USD as an inflation hedge against the dollar is meaningless. Furthermore, BTC is too volatile and too bubble-ish to be considered a safe haven of any sorts.

Whenever there is a crisis in the economy, investors flock to safe haven assets. In March 2020, many investors got out of equities and into T-bills or money market funds (MMFs). Others invested into gold. Both are typical outcomes of investor behavior during uncertain times. I've shown this in one of my previous texts on Seeking Alpha - the so-called 'smart money' (big institutional investors) has been flocking into T-bills and MMFs. Back then even gold prices went down initially (BY ABOUT 12%), as there seemed to be no safe asset to move into.

However, after the Fed committed to zero interest rates, equities once again became attractive. As did gold - its price went up from $1500 in March to over $2000 in early August. Investors buying gold did it as a typical inflation hedge - the dollar was depreciating due to the Fed stimulus, and investors worried that holding dollar-denominated assets would lower their value. The same thing happened to gold and the dollar in the aftermath of the 2008/2009 financial crisis (with gold doubling in value, reaching $1800 in August 2011).

Sometimes, however, other currencies can act as an apt inflation hedge or safe haven asset. During the height of the Eurozone sovereign debt crisis, investors were moving out of the euro and into the Swiss franc (CHF), the only safe haven currency available. The euro started depreciating against the franc first in a longer pattern from September 2008 until August 2011 (that August signaled a big panic in the Eurozone with an imminent bankruptcy of Greece threatening to pull Italy and Spain along with it), and then again sharply in January 2015 (a consequence of political outcomes in Greece). The CHF stayed strong ever since.

This time, some investors think they've found another safe haven. Demand for CHF since March 2020 hasn't been nearly as high as it was during the sovereign debt crisis, as it was replaced by demand for another alleged safe haven currency - Bitcoin. Ever since September the price of BTC went from $9,000 to an incredible $40,000 in early January. One part of an explanation behind this surge in price was to replace demand for gold and even equities to some extent, but a large part of it is pure hubris. BTC has a certain allure of having no central bank behind it, meaning that there is no worry of currency manipulation or devaluation due to money printing. This also means that its price is driven by pure supply and demand, or in simple terms, how many people are buying vs how many people are selling.

Having no central authority issuing a currency can obviously backfire when there is a run on the currency, i.e. when you have too many people trying to sell, and not enough buyers. There is zero downside protection and investors can lose everything. It is virtually the same effect as if a government prints its way to prosperity (as it tried to do in Weimar Germany in the 1930s or in Zimbabwe in the 2000s).

For this reason BTC is massively volatile and incredibly unpredictable. Such an asset, under no circumstance, can be considered a safe haven. A safe haven is an asset you are certain will not lose value and be relatively stable over time (US T-bills, CHF, gold, cash), with a hope it will slightly appreciate. Gold has, compared to BTC, had a very slow appreciation but has managed to go up 55% since January 2017 (most of gains in 2020). BTC, meanwhile, went up 3675% in the same period, while having quite a few ups and downs, while its biggest growth came in the space of a few months. This is a highly speculative asset. If someone wants to invest in it, by all means do, but don't fool yourself into thinking you are hedging against anything. Especially inflation.

*This information is solely an excerpt of a third-party publication and is incomplete. Please subscribe to the referenced publication for the full article. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

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