Rising food prices are a harmful result of inflation. Can you use crypto to protect your pocketbook?
Inflation is the systematic erosion of the purchasing power of money. Governments and central banks often attribute inflation to supply shocks, rising production costs or geopolitical instability. These factors may drive temporary fluctuations in inflation under specific circumstances, but they all stem from a deeper, underlying cause: the relentless expansion of the money supply.
Persistent inflation occurs when the growth of the money supply outpaces economic output, reducing the purchasing power of each dollar. In simple terms, when more dollars are printed, each dollar buys less.
Fiat currencies like the dollar are vulnerable to inflation because governments can create money at will, and often do so for political expediency. Even in times of economic stability, central banks deliberately try to balance inflation at a rate of 2% annually. This figure traces back to a short-lived policy adopted by the Central Bank of New Zealand in 1989. Somehow it took hold, and the entirely arbitrary 2% target has since been enshrined as economic orthodoxy.
The stated reason that 2% inflation is desirable is because it “spurs growth,” though no clear mechanism for how inflation drives economic expansion has been identified. Meanwhile, expanding the money supply devalues government debt, enables unchecked deficit spending and imposes a silent tax on the public, all without the need for legislative approval.
Inflation is a certainty, like death and taxes. The purchasing power of your dollars will decline over time; the only question is by how much and how fast. The rational response is to store wealth in assets that rise in price as new money enters the system. Stocks, bonds, real estate, commodities and even some cryptocurrencies serve this function, each with its own risk-reward profile. Investing, at its core, is about front-running inflation.
But with every investment comes risk. The wrong bet could leave you worse off than if you had simply held cash. As Warren Buffett warned, “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1.” If the goal is to hedge against inflation—not gamble on speculative upside—the priority should be asset stability.
Historically, the “gold standard” of inflation protection has been, well, gold. It won’t make you rich, but its purchasing power has remained remarkably consistent. An ounce of gold today buys roughly the same amount of land as it did hundreds of years ago. Very few assets can claim that kind of track record.
For the first time in history, there is a digital alternative, one that combines gold’s scarcity with superior portability, divisibility and censorship resistance. That asset is bitcoin (and to some extent other cryptocurrencies), and its role in inflation hedging is growing.
How Does Cryptocurrency Hedge Against Inflation?
Unlike fiat money, some cryptocurrencies have fixed supplies and are not controlled by central authorities, making them resistant to inflation. Bitcoin, viewed by some as “digital gold,” is the most prominent example. However, other cryptocurrencies are also sometimes used as inflation hedges. Let’s examine some of the ways crypto can serve as a hedge against inflation.
Limited Supply (Bitcoin As Digital Gold)
Bitcoin’s monetary policy enforces scarcity. Unlike fiat currencies, which can be printed in unlimited quantities, bitcoin has a fixed supply of 21 million coins. This scarcity is enforced by its code and network consensus, making it immune to inflation.
Historically, assets with limited supply have been effective inflation hedges. Bitcoin and gold share this quality, but bitcoin has several advantages: it’s more portable, easily verifiable and resistant to confiscation. When inflation accelerates, more investors seek hard assets, and bitcoin will continue to attract investment.
Decentralization And Independence
Bitcoin operates outside of government and central bank control. No single entity can manipulate its supply or freeze transactions. This independence makes bitcoin especially appealing in economies suffering from currency devaluation or even hyperinflation, where people seek an escape from failing fiat systems. In countries like Turkey and Lebanon where local currencies have collapsed, bitcoin offers a crucial lifeline.
Global Store Of Value
Crypto’s borderless nature allows it to function as a global store of value, unbound by the inefficiencies of the traditional banking system. Unlike fiat currencies, which rely on fragmented financial infrastructure and jurisdictional restrictions, cryptocurrency moves seamlessly across the internet, unrestricted by national borders.
As inflation accelerates and trust in fiat currencies erodes, people seek alternatives to safeguard their wealth. Gold has long served this purpose, but bitcoin presents unique advantages: it is digital, highly portable and accessible to anyone with an internet connection. For those looking to hedge against monetary debasement, bitcoin stands as a resilient defense against both inflation and currency devaluation. While some altcoins may offer short-term storage of value, their long-term reliability is questionable, making them far too risky to serve as a stable hedge over any meaningful time horizon.
Increasing Institutional Adoption
A major shift has occurred in recent years as institutional investors recognize bitcoin’s potential as a store of value. With the approval of bitcoin ETFs and firms like BlackRock, Fidelity, and BNY Mellon integrating bitcoin into their offerings, institutional participation has surged.
This growing demand from institutions adds credibility to bitcoin as a financial asset and strengthens its role as an inflation hedge. Large-scale adoption by hedge funds, corporations, and governments will dampen price volatility and reinforce bitcoin’s value proposition as a long-term store of wealth.
Alternative To Traditional Assets
Gold and real estate have long been considered inflation hedges, but they have limitations. Gold is difficult to transport and verify, while real estate requires significant capital and lacks liquidity.
Bitcoin and other cryptocurrencies offer an alternative that combines the scarcity of gold with the accessibility of digital assets. While bitcoin is the primary inflation hedge, it is not impossible that other cryptos may one day offer alternative strategies to hedging inflation risk.
Challenges Of Using Crypto To Hedge Against Inflation
While crypto presents a compelling alternative to fiat, it is not without risks. Investors must consider the following challenges before relying on digital assets as an inflation hedge.
High Volatility
Cryptocurrency markets are known for extreme price swings. While bitcoin has appreciated significantly over the long term, it has also experienced sharp drawdowns, sometimes losing 50% or more of its purchasing power in short periods.
For investors seeking stability, bitcoin’s volatility can a drawback. However, volatility is not equivalent to risk. One would expect prices to stabilize as bitcoin is widely adopted and liquidity deepens. Meanwhile, bitcoin’s most critical property—monetary integrity—is already established. Unlike fiat currencies, where inflation is a certainty, bitcoin’s fixed supply ensures that its inflation risk is effectively zero.
Regulation And Government Intervention
Governments and regulatory agencies continue to grapple with how to classify and control cryptocurrencies. While some countries embrace bitcoin as legal tender or an investment asset, others impose restrictions or outright bans.
Regulatory uncertainty can affect price stability and investor confidence. While bitcoin’s decentralized design makes it resistant to outright bans, policies affecting on-ramps (such as exchanges) can still restrict access to it.
Correlation With Risk Assets
Bitcoin has, at times, shown correlation with equities, particularly during market selloffs. However, this correlation is situational rather than structural, driven by short-term liquidity crises. When investors need cash quickly, they sell what they can, and bitcoin, as a 24/7 liquid asset, is often included in that category.
A study of bitcoin’s correlation with major financial assets from 2013 to 2021 found that it is correlated with risk assets over long time periods, with significant short-term deviations. Recently, this has begun to change. In 2024, bitcoin’s correlation with tech stocks was found to be moderate-to-strong on only 10 out of 262 trading days.
Bottom Line
Crypto, and particularly bitcoin, offers a unique hedge against inflation due to its fixed supply, decentralization and lack of correlation with other assets. While traditional assets like gold remain relevant, bitcoin is also used as an inflation hedge in the 21st century economy. As inflation continues to erode fiat currencies, bitcoin’s role as an inflation hedge is likely to grow, reinforcing its value proposition as “digital gold.”
