Bitcoin Showing Inflation Hedge Possibilities

Bitcoin has long been referred to as “digital gold” — a tag implying the digital currency has inflation-fighting capabilities on par with the yellow metal.

On that note, both assets were disappointing in 2022, but with the Consumer Price Index (CPI) still residing at uncomfortably high levels, investors are craving inflation-defeating assets, particularly those with significant upside potential. Bitcoin checks that box.

More recently, bitcoin’s 2023 resurgence has been fueled by factors extending beyond inflation, including bank runs.

“The run on Silicon Valley Bank underscored the remarkable capabilities of digital finance, with venture capitalists effectively toppling a bank using smartphones and group chats in just a matter of hours. During periods of political turmoil such as wars, pandemics or shifts in government, the importance of digital portability cannot be overstated. After all, it’s improbable that anyone would transport gold or paper bonds across borders,” noted angel investor Tatiana Koffman in a post on CoinDesk.

Koffman, the publisher of the weekly newsletter, MythOfMoney.com, presents a historical example regarding why bitcoin could remain a useful inflation-fighting asset class over the near- to medium-term. Put simply, the Federal Reserve was able to halt historically high inflation in the early 1980s, but it took drastic interest rate increases.

In mid-1981, the Fed funds rate was almost 20% — an unthinkable level today. That is to say that inflation can be reversed, but there could be bumps on that road, and that turbulence could highlight the allure of bitcoin for some investors.

“Numerous analysts and economists now hold the belief that to effectively curb inflation, the federal funds rate must exceed the rate of inflation for a sustained period. Presently, inflation hovers around 6% (as of February 2023), while the federal funds rate range stands between 4.75% and 5%. Consequently, further interest rate increases are likely on the horizon,” added Koffman.

She also noted that famed investor Paul Tudor Jones measures the effectiveness of inflation-fighting assets using four metrics: purchasing power, liquidity, portability, and trustworthiness. Those are all boxes checked by gold. Specific to bitcoin, a case can be made that the largest cryptocurrency is answering the purchasing power call, and its portability is undeniable.

For now, bitcoin liquidity is solid, though that could be affected by more market participants holding their stakes for extended timeframes in hopes of a return to the late 2021 record high around $69,000. As for trustworthiness, bitcoin lacks gold’s 2,500-year history, but remaining sturdy when inflation is high could go a long way toward building trust with investors.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.