Best asset for hedging against inflation: Bitcoin or Gold?

Franklin Izuchukwu

The inflation rate has been on the rise; there is a need to analyse the best hedge against inflation. Gold has been the historic inflation hedge, but Bitcoin seems eager to be noticed.

A bunch of gold blocks.

Inflation in the United States (US) has risen following recovery from the COVID-19 pandemic. The Bureau of Labor Statistics reported that the Consumer Price Index (CPI) rose 6.2%, the highest since 1982.

CNN also reported that the markets are worried about an impending inflation rise and are looking for options to mitigate risks.

Over the years, the food price has risen to 6.1% in the US alone, with energy prices jumping to 33.3% since November 2020. However, some economists still believe that inflation is near the peak with declining energy prices reports.

Investors, corporations, companies, and individuals are wary of inflation because it depreciates assets. The most viable option becomes finding an inflation hedge - an investment that can hold off the depreciating effect of inflation over time.

Gold has been a true and verified inflation hedge in the past centuries, probably due to its intrinsic value and scarcity, but a new kid is in town - Bitcoin. Bitcoin has risen from ground zero to over 40,000 USD since its creation in 2009. It has been on a momentum surge, and there is a strong community of mainstream investors backing the Digital gold.

The fight for a better inflation hedge has seen investors doubling down on a more viable option between Gold or Bitcoin. The article will bring objective analysis on the role of Bitcoin and Gold as an inflation hedge and maybe offer reasons why one might be better than the other.

When there is an excess money supply in the economy, inflation might heat up.

Understanding rising Inflation

The CPI reflects purchases made by an average person in the U.S.; a CPI of 6.2% shows that the prices spent on goods like food, clothes, energy have risen by 6.2%.

When analysts report that inflation has crept to 6.2% in one year, it underscores that its currency is 6.2% less worth than it was a year ago.

The COVID-19 pandemic resulted in the drive-up of demand for goods and services, which is one of the causative effects of inflation. Increased government spending also adds more gas to inflation, leading to more inflation.

After the pandemic, many countries engaged in creating relief funds as part of social welfare for their citizens. The U.S alone spent trillions of dollars as a relief package for the residents. Some economists see the incoming bills (infrastructural and build back better bills) as a ticking bomb for inflation.

With inflation, the dollar loses part of its value; it is worth noting that many Americans receive their wages, salaries and investment returns in the U.S. dollar. To circumvent these, Investors need a viable inflation hedge that could ensure profitable returns in the long run.

Gold has been a historical hedge against inflation

Left with not many options, Gold has been the go-to asset for an inflation hedge. Gold has a few advantages to come up as the favourite asset when opting for an investment to hold against inflation.

Gold has an intrinsic value as a precious metal that Manufacturers can process into luxury goods. Gold is also scarce, which ensures an upside in value. The precious metal is also durable and can be transferred from one place to another.

The argument about the best asset to hedge inflation has revolved around the above advantages and that Gold has been in existence for centuries.

From 1973 to 1979, when the inflation rate averaged at about 8.8%, investors saw over 35% return from Gold investments.

However, investors lost over 10% of their investment in Gold from 1980 to 1984 when inflation in the USA was 6.5%. A negative return was also witnessed from 1988 to 1991 when inflation was only about 4.6%.

A portfolio strategist at Morningstar, Amy Arnott, remarked that Gold is not a perfect inflation hedge when inflation is average. She also noted that the correlation of Gold to inflation has been relatively low in the last 50 years. A relation value of 0.16 is low, Arnott argued.

Michael McClary, an investment officer in Ohio, clarified that he would not buy Gold simply because inflation is en route.

Image from Unsplash.com

Bitcoin may be a potential inflation hedge for good reason

During high inflation, Investors make decisions by taking higher risks to offset the possible loss from assets due to inflation.

For instance, an individual can decide to invest in a retirement fund with an expected annual return of 3%; such investment can never serve as a good hedge against inflation when inflation hovers around 6.5%.

Some individuals and investors from around the globe opt for the S&P500 as a formidable investment.

The S&P500 index is used to calculate the average yield from the stocks exchanges in the U.S because it enlists the top 500 traded U.S companies and oversees about 80% of the entire U.S stock market exchange.

A report from Goldman Sachs showed that in the past 140 years, the average 10-year return from the S&P500 lingers at 9.2%, though it has performed better in the last 10 years 2010-2022, averaging at about 13.6%.

The above figures only show an average; in 2018, the S&P500 returned a negative 4.4% and about 1.4% in 2015.

These days valuations have increased, which might lead to a lower yield or return on investment (ROI); a report by Forbes shows that there is a high correlation between increased valuation and reduced ROI.

Another factor standing against Stocks as a better inflation hedge is the direct link with government and its policies, unlike Bitcoin, which was created as a parallel monetary alternative.

Bitcoin bulls argue that bitcoin hosts lots of characteristics that make it a better hedge against inflation; some of these features are explained below:

  • Bitcoin has shown a track record of steady ROI

    Bitcoin is a very volatile digital asset. The volatility may be an attractive factor among investors willing to take more risks.

    Bitcoin trounced both Gold and S&P500 with a yield of 164% in 2020; by contrast, S&P500 recorded only 13% gain while Gold returned 21%. In 2021 bitcoin has claimed about 69.55% ROI while Gold posted a negative 5.11%.

    An article by Coindesk compared the ROI from Bitcoin and Gold investment over time showed that a $1 buy-in 2010 would have been worth $776,397.69 in Bitcoin and $1.56 in Gold (2021).

    Bitcoin is not without a blemish; it attained one of its All-time-High (ATH) of $63,000 in April 2021. However, it later dipped, shedding off 50% of its value in the following three months.

  • Bitcoin's supply is capped: It is a scarce asset

    Gold has been a good store of value and inflation hedge because of its scarcity, likewise Bitcoin, which has a limited supply of only 21 million units.

    Its deflationary model maintains how it's mined; it took 4 years to mine half of Bitcoin, but it will take another 120 years to mine the remainder.

    This model prevents inflation, unlike what is obtainable with fiat currencies where the Government can decide to print new money out of thin air, thereby increasing inflation.

  • Bitcoin is a store of value

    Unlike Bitcoin, Gold has been a known store of value as a precious metal. Still, proponents of Bitcoin argue that the blockchain network (which was built to support Bitcoin) now offers practical applications in health, finance, agriculture etc.

    Bitcoin also provides succour (as a store of value) to residents in countries facing frequent hyperinflation and political instability.

  • Bitcoin is more decentralized than Gold

    Bitcoin can be a better inflation hedge due to its decentralized structure. Bitcoin is not under the control of any government institution but solely controlled by lines of codes.

    On the other hand, Gold is controlled by few countries like China, Russia, Australia, Canada, and the USA, which ranks as the top 5 Gold suppliers globally.

    The decentralized structure of bitcoin permits inclusion and access to a wide range of demographics; Gold, on the other hand, is not easily accessible to low-income earners.

  • Bitcoin is easily transferrable and more secure

    Gold may have been a historical hedge against inflation, but the recent advantages offered by bitcoin seeks to counter the narrative. For instance, Bitcoin can be transferred easily within minutes, unlike Gold, a physical asset.

    One of the reasons gold is a hedge against inflation is the intrinsic value, but history has shown that Dubious merchants can produce fake Gold. Still, it is impossible to make a bitcoin counterfeit.

Bitcoin is dubbed the new digital Gold

Takeaway: Should you invest in Bitcoin, Gold or Stocks?

The best asset for retirement plans, inflation hedge and other investment options boils down to choice after due diligence on research.

The analysis on this article has shown that there has been a steady ROI on stocks, which makes stocks stand better when compared to Gold and Bitcoin as inflation hedges.

Gold has shown a sketchy path as an investment option and inflation hedge—the precious metal has been associated with minimal returns or even a negative ROI.

Bitcoin is a new asset globally but has shown steady returns of over 100% since it was launched. The success of Bitcoin is attributed to high volatility, which can be a curse or a blessing. Bitcoin may be the best inflation hedge for investors who are more willing to take more risks for maximum returns.

Stocks can also be an option for investors with a low-risk threshold.

The concept of inflation can never be stale news in the investment market; thus, Clacified advises that necessary research is carried out before choosing the best asset to hedge against inflation.

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