Bitcoin vs. Gold: what is the best hedge against inflation?

As inflation rages and hits 40-year highs, investors are looking for anything to mitigate its effects on their portfolios. At times like these, investors often turn to commodities, especially gold, which has a long history as a hedge against inflation. More recently, some traders have touted Bitcoin and other cryptocurrencies as alternative ways to hedge inflation. Is one better than another?

Here’s the bottom line: Gold beats Bitcoin as an inflation hedge for a variety of reasons. In fact, many experts do not consider Bitcoin or other cryptocurrencies as an inflation hedge, at least not yet.

What is an inflation hedge?

A hedge is a kind of investment that offsets something else, but the logic behind a hedge investment can differ depending on what exactly the investor intends to do.

“A hedge can be a correlated but contra position in the movement of an asset price or an uncorrelated entity that provides stability in times of volatility,” says Emily Man, investor at venture capital firm Redpoint Ventures. in the San Francisco Bay Area.

For the first, she says airlines buy oil futures as a way to hedge their future earnings. For the latter definition, Man points to hedge funds that might buy Visa stock but short their competitor Mastercard as a way to isolate specific risks and opportunities that impact the two companies.

Thus, an inflation hedge is an investment that offsets all or part of the effects of inflation. Perhaps hedging increases as inflation rises (offsetting the decline in stocks, for example). Or perhaps the hedge is simply largely inflation-proof as a factor, providing stability to a portfolio.

Does Bitcoin or Gold Better Protect Against Inflation?

When comparing Bitcoin and gold as inflation hedges, experts point to a number of dimensions on which to compare them: their track record, efficiency, ease of access, and other sources of demand for inflation. asset itself.

History as a Hedge Against Inflation – How Bitcoin and Gold Compare

On the question of their history as inflation hedges, there is no doubt that gold has a solid track record, while Bitcoin is barely over a decade old to back itself up.

“Gold has thousands of years of established history as a resolute store of value,” says Fergus Hodgson, Director of Econ Americas, Roving Editor of Gold Newsletter. “Over a long period, this is the safest inflation hedge you can get.”

In contrast, cryptocurrency is a relative newcomer to global asset markets.

“Bitcoin, however, has a 12-year track record so far and is still fully defining its characteristics as a hedge in this modern economy,” says Chris Kline, COO and co-founder of Bitcoin IRA, a company that allows investors individuals to buy cryptocurrencies in a self-directed IRA.

However, Hodgson doubts the long-term viability of the cryptocurrency.

“Its future as a store of value is precarious,” he says. “In my assessment, central bank digital currencies and altcoins will challenge the value proposition of Bitcoin as a medium of exchange.”

The recent move by the Biden administration to regulate cryptocurrency also includes the potential for the creation of a US central bank digital currency.

Effectiveness as an Inflation Hedge – How Bitcoin and Gold Compare

The lack of longevity raises serious questions about Bitcoin’s ability to be an effective inflation hedge. Meanwhile, gold has long demonstrated its ability to act as a hedge, according to many experts.

“There really is no historical data on Bitcoin as an inflation hedge,” says Adam Perlaky, Principal Analyst, World Gold Council. “There has actually been no period of high inflation during Bitcoin’s existence. There is no data to back it up.

Perlaky points out, however, that the lack of data does not mean that Bitcoin could not become an inflation hedge, rather that there is no demonstration of this potential so far.

In contrast, he says that “there is evidence that gold is a hedge against inflation and that is one of the reasons why investors buy gold” and that gold has performed well in periods of high inflation.

In support of Bitcoin, Kline of Bitcion IRA points to the cryptocurrency’s potential to act as a defense against central bank money printing.

“Bitcoin has a finite supply,” he says. “The government has been printing unprecedented amounts of money since 2008, and it’s starting to have an impact on the wider economy. This 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.

“Now that real estate prices are off the charts and gold is inaccessible to the average American, crypto has become part of that inflationary hedging mix,” Kline says.

But Robert R. Johnson, professor of finance at Creighton University, further emphasizes Bitcoin’s inability to be an inflation hedge.

“You can’t invest in the wide range of cryptocurrencies, you can only speculate,” says Johnson. “There is no rational way to determine the value of Bitcoin or any of the other cryptocurrencies, as one cannot apply the tools of traditional finance to arrive at the intrinsic value (or real value) of assumed asset.”

Ease of Access – How Bitcoin and Gold Compare

Bitcoin and gold are relatively easy to buy and clear, especially since there are ready markets for both. But gold has the edge due to more established ways of trading it.

Gold might be relatively easier to invest in, given the wide range of ways to do so, including buying actual physical gold, buying ETFs that own physical gold, or gold companies , as well as futures contracts. Investors have many ways to get interested in gold, depending on their intention. Many of these ways involve exchange-traded products such as stocks and ETFs, giving investors easy and cost-effective access to their investment.

For those looking to buy physical gold, however, Bitcoin IRA’s Kline warns of the “storage logistics, shipping, and security requirements” that come with this type of gold investment.

Traders can buy Bitcoin through crypto exchanges and now through traditional brokers, if they don’t mind the broker having custody of the cryptocurrency. Those who insist on taking custody of their coins will want to go through an exchange or intermediary that allows this.

Although access to bitcoin is a bit more complex than gold, bitcoin proponents have been pushing to find equally easy ways to buy bitcoin through mediums of exchange such as ETFs. For now, traders can buy Bitcoin futures ETFs, which provide similar exposure to the digital currency.

In terms of costs, Bitcoin can sometimes be cheaper. Traders can pay one-time commissions for owning Bitcoin. In contrast, those who buy gold ETFs may pay no commission, but pay an ongoing expense ratio that is a percentage of the total investment. So if this type of gold investment is held long enough, it could cost more than the Bitcoin commission, depending on the exact cost of this commission. However, frequent trading can drive up commissions quickly.

Other Sources of Bitcoin and Gold Demand

Those looking to use Bitcoin or gold as an inflation hedge should also understand other sources of demand that can support the prices of these assets.

Gold has many use cases including industrial and electronics applications, jewelry, medical applications, and of course it is often purchased by central banks as a store of value.

“Understanding trends in addition to investing is important because the multifaceted nature of demand is a unique attribute of gold and a key reason why it is an effective strategic part of portfolios,” says Perlaky of the World Gold Council.

In contrast, Bitcoin’s usefulness relies entirely on its ability to be exchanged for other things, including traditional currency. So if bitcoin can’t be used to buy things or if people can’t trade it with others who value bitcoin in this way, it’s effectively worthless.

“Bitcoin is a purely speculative asset with limited capacity as a medium of exchange,” says Johnson of Creighton University.

“Bitcoin has enjoyed first-mover advantage among cryptocurrencies, but its use case is weak,” says Hodgson of Econ Americas. “Its intrinsic value was supposed to be its convenience as a medium of exchange, but even proponents are now hesitant to affirm this and try to label it digital gold.”

At the end of the line

While gold may be a better inflation hedge than Bitcoin, could traders at least use Bitcoin as a hedge against a volatile stock market? Even that seems dubious.

“We have historical evidence of how cryptos have performed during systemic market selloffs,” Perlaky says. Crypto behaves more like a risky asset, more like tech stocks or momentum stocks.

This kind of correlation makes Bitcoin a poor hedge for stocks, at least so far.

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