Is Bitcoin a hedge against inflation?

Keeping money in assets like gold, real estate, stocks, and crypto helps curb inflation.

Since cash loses purchasing power over time, storing cash causes people to lose their savings. This has prompted people to store their money in assets of value such as gold, real estate, stocks and now crypto. Will Bitcoin protect against inflation has been a question in town ever since.

To be held as a store of value, an asset should be able to maintain its purchasing power over time. This means that it should increase in value or at least remain stable. Key characteristics associated with such assets are scarcity, accessibility and longevity.

Gold as a hedge against inflation

Gold has had a mixed track record during past periods of inflation. There were times in the 1980s when holding gold brought negative returns for owners.

Morningstar data provides a glimpse into gold’s patchy track record in past inflationary bouts. A commodity intended to hedge against inflation is likely to rise as consumer prices rise. During periods of high inflation, particularly the 1980s, there were times when gold holders saw negative returns.

Gold has slowly lost its luster as a hedge lately. During the pandemic, and even when the waves have subsided, people are showing less interest in gold. It is still considered good enough to hold value over the long term, but the metal is now viewed as less reliable in the short term.

Real estate as a hedge against inflation

The bursting of the US housing bubble has made it clear that real estate cannot always be relied on as an inflation hedge.

Real estate has long been considered an effective hedge against inflation. However, this myth was shattered in the US housing bubble. In March 2007, home sales and prices in the country suffered a sharp decline. According to data from the National Association of Realtors (NAR), sales fell 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 to factors such as government policies, the country’s political and economic stability, local demographics and economies, geography, and infrastructure, among others. Parameters are just too many for a normal person to understand.

Stocks as a hedge against inflation

Long-term investing in stocks helps bridge the effects of inflation. Just make sure the company has strong fundamentals.

Some stocks help protect the value of your investment. Even when hit by impatient investors in the short term, these stocks recover nicely over time. But you have to keep in mind that not all stocks are good inflation hedges. You need to find companies that have strong fundamentals and are more likely to generate better dividends for their shareholders.

A common thread: linking gold, real estate and stocks with centralized entities

Traditional asset classes are controlled by centralized authorities, making them vulnerable to bias and pressure.

Without exception, the value proposition of all conventional asset classes is linked to the policies of centralized authorities such as governments or federal banks. An asset that is so tightly linked to a system that asset owners cannot intervene is not really a reliable hedge as the centralized authority exercises control over the process at the push of a button. Is Bitcoin a hedge against inflation?

Fry Electronics Team

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