Can Bitcoin Protect You From Inflation?

Bitcoin is often referred to as digital gold. Unlike fiat money such as the US dollar, its supply expands at a slow, steady rate.

The Federal Reserve has printed so much money during the COVID crisis that money supply is up over 25%. This has led to fears of inflation. The consumer price index (CPI) jumped by 4.2% in the first quarter of this year, the highest since 2008.

So can bitcoin, with its steady supply, provide protection from inflation? Bitcoin hasn’t existed long enough to provide a good test, but the evidence we have indicates that it doesn’t really correlate with the price index and thus is unlikely to provide a good inflation hedge.

Take a look at the Fed’s preferred measure of inflation, the personal consumption expenditures (PCE) index excluding volatile food and energy prices. It’s been pretty consistent in the last decade, bouncing around the 2% level:

At the end of 2020, prices plummeted, pushing the US economy into deflation for the first time since this data series began in the 1950’s. If bitcoin is to provide an inflation hedge, it would need to drop when prices do and increase when prices rise. But we saw the opposite behavior, with bitcoin going vertical:

If you look at CPI as an inflation measure, you see the same pattern, with a noticeable decline in 2020 that wasn’t reflected in bitcoin:

Bitcoin doesn’t seem to perform well as an inflation hedge, although it could be useful for other purposes. If you’re worried about inflation, I’d suggest Treasury Inflation Protected Securities, which pay you a fixed rate plus the rate of inflation, protecting your interest payments from erosion by rising prices.

Dig into these posts for more on Bitcoin:

Photo: “Bitcoin, bitcoin coin, physical bitcoin, bitcoin photo” by antanacoins is licensed under CC BY-SA 2.0

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