Can Bitcoin overthrow Gold’s centuries-old reign as the best hedge over inflation?
This question has sparked curiosity among many individuals, financial advisors, and investors.
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Gold has been an unrivaled asset that protects currencies and investments over inflation for centuries.
Its value has endured through economic storms and market turmoil. Still, things are shifting as Bitcoin, an innovative decentralized digital currency, has emerged to disrupt the traditional financial market as we know it.
As inflation continues to rise globally and investors scramble for safe havens, the stage has been set for the showdown between these two assets.
Can Bitcoin's unique qualities outshine the traditional acceptance of physical gold? Will Gold yield to Bitcoin as a better inflation hedge, or will its centuries-old reign remain unbroken?
Keep reading to find out more!
Key Takeaway
- Inflation is the steady increase in the general price level of goods and services in an economy over time.
- Gold has traditionally been considered a reliable store of value and an effective hedge against inflation for centuries.
- With its limited supply, decentralized nature, and growing adoption, Bitcoin is touted as a modern-day safe-haven asset.
- Gold appeals to investors with a lower risk appetite, while Bitcoin is highly recommended for investors with a higher risk appetite.
Inflation
Mike Maloney once said, “Inflation is the hidden tax that destroys the purchasing power of a currency.” This is certainly true today.
Inflation is the gradual increase in the overall price level of goods and services in an economy over time.
It also measures how quickly prices are rising during a specific period.
Here is an example to describe this better: Imagine you had $200 last year and could buy 20 of your favorite Ice Creams with it, but this year, these Ice Creams increased by 20%. Now, your $200 can only buy 16 of them.
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That is precisely what inflation does. It reduces your purchasing power.
Inflation can be caused by a good number of things, which include:
- Demand and supply imbalance: Businesses raise prices when demand for goods and services exceeds supply.
- Monetary policy can range from a country’s central bank printing more money or increasing interest rates.
- Economic growth: This is when the economy is rapidly growing. Higher demand for goods is seen here, and this influences price increases.
- Supply chain disruptions: Here, shortages or disruptions in supply chains drive up prices.
- External factors: Wars or natural disasters can impact prices and cause inflation.
Some notable inflation events in history include:
- The 1970s stagflation: This took place under the presidential leadership of Richard Nixon (1969-1974), Gerald Ford (1974-1977), and Jimmy Carter (1977-1981).
During that period, inflation grew to over 15%, with stagnant economic growth and high unemployment.
- Zimbabwe's hyperinflation: This occurred between 2000 and 2008. Prices doubled every day, rendering the Zimbabwean currency 100% worthless.
- Germany's post-WWI hyperinflation lasted from 1921 to 1923. Prices rose so high that people used wheelbarrows full of cash to buy basic items like tissues and food.
Prices were often quoted in foreign currencies to maintain a commodity's price value.
Today, inflation has had a significant impact on investments globally. Here are some of its effects:
1. Reduced purchasing power
Inflation has slowly eroded the value of money, reducing the purchasing power of investments that generate fixed returns, such as bonds and savings accounts.
2. Stock market volatility
Inflation has led to stock market fluctuations, as rising costs and interest rates affect companies' profits and valuations.
3. Commodity prices
Inflation has increased commodity prices, benefiting gold, oil, and real estate investors.
4. Interest rate changes
Central banks have raised interest rates to combat inflation, affecting borrowing costs and asset prices.
5. Currency devaluation
High inflation has led to currency devaluation, impacting international investments. And companies with strong pricing power pass on costs to consumers to benefit from inflation.
Gold as an Inflation Hedge
Gold has been considered a reliable store of value and an effective hedge against inflation for centuries. Gold's price tends to rise during high inflation, maintaining its purchasing power.
Here are some periods of high inflation and Gold’s performance.
- 1970s Stagflation: Gold rose from $35/oz in 1970 to $850/oz in 1980, as inflation peaked at 14.8% in 1980.
- 2002-2011: Gold increased from $250/oz to $1,900/oz as inflation concerns rose during the global financial crisis.
- 2020 COVID-19 Pandemic: Gold reached $2,000/oz, driven by inflation concerns, monetary policy, and safe-haven demand.
- 2024: Gold increased to $2,500/Oz for the first time.
Regardless of these seasons, this asset can maintain purchasing power. This is due to its:
- Limited supply: Gold's supply grows slowly, reducing inflation risk.
- Store of value: It is a tangible asset, retaining its value over time.
- Diversification: Its performance is often uncorrelated with other assets, reducing
- portfolio risk.
However, this asset has some limitations as an inflation hedge, making it a dicey option for investors.
These limitations include:
- Volatility: Its price can fluctuate rapidly, reducing its effectiveness as a short-term hedge.
- No dividends: It doesn't generate income, unlike other assets.
- Storage and security: Physical gold requires secure storage, thereby adding costs.
- Counterfeiting risks: Gold coins or bars can be counterfeited.
- Liquidity risks: Its liquidity can be limited in specific markets or situations.
- Central bank actions: Banks often influence prices through high-volume sales or purchases.
Bitcoin as an Inflation Hedge
With inflation continuously eroding the purchasing power of traditional currencies like the Dollar, risk-savvy investors quickly turn to alternative assets like Bitcoin to protect their wealth.
Today, Bitcoin has emerged as an attractive asset to hedge over inflation. This is because of its limited supply, decentralized nature, and growing adoption. Many investors have touted this digital currency as a modern-day safe-haven asset.
Below are some unique benefits that make this asset stand out from other investment assets.
- It has a limited supply of 21 million total Bitcoins, reducing inflation risk.
- It is a decentralized asset with no central authority to manipulate its supply or value.
- Bitcoin is built on the blockchain, which ensures tamper-proof transactions.
- It is easily transferable and storable.
- Bitcoin can be divided into smaller units called satoshis.
A Brief Historical Performance
- 2009
Bitcoin was launched into the world by Satoshi Nakamoto. Its price value was stated at $0.0009.
- 2010-2013
Bitcoin's price rose from $1 to $1,000 during a period of moderate inflation before it dropped again.
- 2016-2017
Bitcoin experienced a price surge from $600 to $20,000 amidst global economic uncertainty.
- 2020
Bitcoin's price rose from $7,000 to $64,000 during the COVID-19 pandemic, characterized by high inflation concerns.
- March 2024
Bitcoin reached an all-time high of $76,000 amidst the approval of Bitcoin ETFs.
Comparison: Bitcoin vs Gold
The table below provides an overview of the unique characteristics of Gold and Bitcoin, highlighting their differences and similarities.
| Features | Bitcoin | Gold |
| Market Size | $1.16 trillion (current market capitalization) | $17 trillion (estimated total value of all gold ever mined) |
| Liquidity | High liquidity in digital markets, increasing in institutional markets. | High liquidity in physical markets, lower in paper markets. |
| Volatility | Highly volatile, 50-100% annual volatility. | Relatively stable, 1-5% annual volatility. |
| Use Cases | Digital payments, smart contracts, decentralized finance (DeFi). | Jewelry, coins, bars, industrial applications, payments, Investments. |
| Store of Value | Emerging store of value, hedge against inflation, currency devaluation, and systemic risk. | Traditional store of value, hedge against inflation and currency devaluation. |
| Durability | Digital, not physical, but highly secure through cryptography. | Highly durable and resistant to corrosion and decay. |
| Portability | Lightweight, easy to transport, and low storage costs. | Heavy, difficult to transport, high storage costs. |
| Supply | Limited supply, 21 million total, 6.25 BTC mined per block (every 10 minutes). | About 2500 - 3000 tonnes of Gold are mined yearly |
| Demand | Growing demand for digital payments, DeFi, and institutional investment. | There is a high demand for jewelry, coins, and bars. |
| Correlation | Low correlation with other assets, emerging safe haven. | Low correlation with other assets, traditional safe-haven. |
| Counterparty Risk | Low counterparty risk, decentralized, cryptographic ownership. | Low counterparty risk, physical ownership. |
| Regulatory Environment | The evolving regulatory framework, varying global approaches. | Well-established regulatory framework. |
| Security Features | Cryptographic security measures (public-key cryptography, blockchain). | Physical security measures (vaults, safes). |
| Environmental Effects | Growing environmental concerns (energy consumption, e-waste). | Alarming environmental impact (mining, processing). |
| Strengths | Emerging store of value, high portability, low storage costs, growing demand. | Traditional store of value, low volatility, well-established regulatory framework. |
| Weaknesses | Highly volatile, regulatory uncertainty, environmental concerns. | Heavy, difficult to transport, high storage costs. |
From the table above, Gold is a traditional store of value with a larger market cap and lower volatility than Bitcoin. This asset is highly recommended for investors with a lower risk appetite as a hedge over inflation.
On the other hand, Bitcoin is an emerging store of value with high portability and growing demand. This asset is a hedge over inflation appeals and is highly recommended for investors with more risk appetite.
However, when investing in any of these assets, you must diversify your portfolio, as these assets only make up 10% of your investment portfolio. This will help lessen the risk, especially when the market experiences high volatility.
- Increased adoption
As an emerging store of value, Bitcoin is predicted to grow into an institutional investment, given its improved infrastructure and rising mainstream acceptance.
- Regulatory clarity
Bitcoin regulatory frameworks evolve. Thus leading to greater legitimacy and stability.
Future Trends of Bitcoin & Gold
Bitcoin
- Technological advancements
Its scalability, security, and usability will improve, thereby enhancing its appeal.
- Store of value
Bitcoin may solidify its position as a digital store of value, competing with gold.
- Price volatility
Bitcoin's price may continue to fluctuate, but potentially with decreasing volatility.
Gold
- Traditional store of value
Gold is expected to continue as a traditional store of value and safe-haven asset for many years.
- Central banks' increasing reserves
Central banks may continue to accumulate gold reserves, thereby supporting its demand.
- Jewelry and industrial demand
Its demand for jewelry and industrial applications will likely remain steady.
- Price stability
Its price may remain relatively stable, with potential for moderate growth.
- Competition from cryptocurrencies
Gold will face more competition from cryptocurrencies like Bitcoin as alternative stores of value.
Conclusion
As the global economy remains unpredictable, there is a pressing need for a reliable edge against inflation.
The future of most currencies and economies is uncertain, but one thing is sure: Bitcoin and gold will be at the forefront of the fight against inflation.
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While both assets have strengths and weaknesses, the ultimate choice of which to use as a hedge against inflation depends on your individual investment goals and risk tolerance.
Stay ahead of the curve and start building your inflation-resistant portfolio today!
FAQs
An inflation hedge is an investment that maintains its value or increases in value during periods of inflation, protecting investors from the erosion of purchasing power.
Bitcoin's performance during inflationary periods is still being studied, but due to its limited supply and decentralized nature, it has shown promise as a potential hedge.
Gold has historically been a reliable hedge over inflation, but its effectiveness can vary depending on market conditions and interest rates.
The answer depends on various factors, including market trends, investment goals, and risk tolerance. Both assets have pros and cons, and investors should carefully consider their options before deciding.
