Is Bitcoin a hedge against inflation?

Putting money in store of value investments like gold, real estate, stocks and crypto helps curb inflation.

As cash loses purchasing power over time, keeping cash leads to people losing their savings. This has prompted people to put their money in store of value investments such as gold, real estate, stocks and, now, crypto. Will Bitcoin protect against inflation has been a question in the town ever since.

To be held as a store for value, an asset should be able to hold its purchasing power over time. In other words, it should increase in value or at least remain stable. Key properties associated with such assets are scarcity, accessibility and durability.

Gold as a hedge against inflation

During past inflationary periods, gold has had a mixed track record. In the 1980s, there were times when holding gold gave negative returns to owners.

Morningstar data gives a peek how gold has had a spotty track record during past inflationary periods. A commodity that is supposed to hedge against inflation is expected to rise when consumer prices are going up. During periods of high inflation, particularly in the 1980s, there were times when gold owners ended up fetching negative returns.

In recent times, gold has slowly lost its luster as a hedge. During the pandemic and even when waves have subsided, people are showing less interest in gold. It is still viewed as good enough for holding value in the long term, but for the short term, the metal is seen as less reliable now.

Real estate as a hedge against inflation

The popping of the U.S. housing bubble underlined that real estate couldn’t always be trusted as a hedge against inflation.

For a long time, real estate has been regarded as an effective hedge against inflation. This myth, however, was busted in the United States housing bubble. In March 2007, home sales and prices in the country suffered from a sharp fall. As National Association of Realtors (NAR) data reveals, sales dropped 13% to 482,000 from the peak of 554,000 in March 2006.

In America and around the world, real estate prices are closely linked with factors like government policy, political and economic stability of the country, local demographics and economy, geographical location and infrastructure, among others. Parameters are simply too many for a regular person to understand.

Stocks as a hedge against inflation

Long-term investment in stocks helps in tiding over the effects of inflation. Just make sure that the company has strong fundamentals.

Some stocks do help protect the value of your investment. Even if these stocks get hit by impatient investors in the short term, they recover well over time. But you need to factor in that not all stocks work well for hedging inflation. You need to find companies that have strong fundamentals and are more likely to draw better dividends for their shareholders.

A common thread: Link of gold, real estate and stocks to centralized entities

Traditional asset classes are controlled by centralized authorities, making them vulnerable to prejudices and pressures.

The value proposition of all conventional asset classes is invariably linked to policies of the centralized authorities such as the governments or federal banks. An asset so intrinsically associated with a system that the asset holders cannot interfere with isn’t really a reliable hedge, as the centralized authority exercises a single button control over the proceedings.