Can Bitcoin hedge against inflation

Bitcoin is digital gold. This is the main idea that promotes the popularity of Bitcoin today. To be a good capital reserve, the growth rate of Bitcoin must always be at least as high as the inflation rate. But it seems that some people no longer understand what this means.

However, it is worth noting that not everyone agrees that Bitcoin can hedge against inflation.

The US consumer price index inflation data released in May was higher than expected. Higher-than-expected inflation, coupled with the relative stability of the 10-year Treasury bond yield, pushed the actual yield beyond the range established since 2008.

Can Bitcoin hedge against inflation

Actual U.S. bond yields since 2008 (as of May 19, 2021)

To calculate the actual yield, users need to subtract inflation from the yield of their favorite bond (in this case, the 10-year U.S. bond). If the real return is positive, then such a bond does save the user’s capital. If the real yield is negative, then holding these bonds will not be enough to keep up with inflation.

Capital preservation tools such as gold or bitcoin do not generate profits. Therefore, if users can get positive actual returns from bonds, then the capital holding these assets may not be so attractive to users. But when the actual bond yield enters a negative range, it becomes reasonable to switch to other ways to preserve capital.

Now, what is the basis for the view that Bitcoin is not like an inflation hedging tool: After the United States released inflation data in May, the price of Bitcoin continued to fall. The conclusion reached is: Bitcoin is not a tool to hedge against inflation.

However, isn’t it a bit lightweight to base such inferences on a single data point?

The fact is that for Bitcoin to become an inflation hedge, its price performance on any given day is irrelevant. Inflation is a phenomenon that will erode the purchasing power of users’ cash over a period of time. But the duration of this time must be more than one day. This process usually lasts for months or years.

The trend of Bitcoin prices in the past few weeks does not prove that Bitcoin has the ability to hedge against inflation.

Although Bitcoin can be used as a hedge against inflation, in the long run, it does not conduct such transactions every day.

Short-term inflation transactions are mainly conducted by financial institutions. But most financial institutions have not yet ventured into Bitcoin. Therefore, the way Bitcoin is traded is different from that of gold.

This behavior is only a function of the acceptance of Bitcoin as a capital reserve by the global financial system. In fact, this can be used as another standard to measure whether Bitcoin is accepted by the traditional financial world. The more sensitive Bitcoin is to changes in actual returns, the more it resembles a traditional store of capital.

So, how does the benchmark capital reserve, that is, gold, behave as an actual return?

In the 1970s and early 1980s, real bond yields were negative on average. Then, in the mid-1980s, the situation improved significantly. Since then, we have been in a very long downward trend, which has more to do with falling bond yields than with rising inflation.

Take a look:

Can Bitcoin hedge against inflation

Real U.S. bond yields since the 1960s (as of May 19, 2021)

Now let’s do this:

Let us plot the price of gold from 1970 to the present (on a logarithmic scale);

Each point representing the price of gold is colored according to the actual income of the day;

The lighter the color, the higher the actual profit. The darker the color, the lower the actual profitability.

This is the result we got:

Can Bitcoin hedge against inflation

Gold interest rate and actual bond yield (as of May 19, 2021)


The relative change in the actual yield seems to explain the long-term trend of the gold market well;

Generally, when the color of the curve changes from light to dark, the price of gold rises. Conversely, when the color of the curve changes from dark to bright, the price of gold drops;

But this is not an exact science;

Obviously, only when the actual rate of return is less than 2%, investors will start to consider buying gold. Relative changes above this level do not seem to have any long-term effects on the trend.

Below is the same picture from 2008 to the present.

Can Bitcoin hedge against inflation

Gold interest rate and actual bond yield (as of May 19, 2021)

As far as Bitcoin is concerned, we (currently) have not had the opportunity to go back 50 years to find a model. But as we might suspect, in the past three cycles, actual returns have not had an impact on the Bitcoin market. The increase in demand due to the adoption of Bitcoin, coupled with a decrease in half of the supply, is the main driving force behind the general price trend.

look by youself:

Can Bitcoin hedge against inflation

BTC interest rate and actual bond yield (as of May 19, 2021)

As Bitcoin becomes more widely used in financial institutions, we may see actual returns play a more important role in Bitcoin’s long-term trend. But we have not yet reached this stage of development.

Currently, Bitcoin can be enjoyed as an asset that does not have a strong long-term correlation with the gold and bond markets. In a period of time, China’s economic growth should be sufficient to keep up with the pace of inflation.

Can Bitcoin hedge against inflation


Posted by:CoinYuppie,Reprinted with attribution to:
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