Since April, we have seen many articles in the popular and financial press about how inflation is now the scourge on the American and global economy. Yes, prices have gone up, but once supply chain issues are fixed, they will probably return to around 2%. However, because of this new focus on inflation that has reached its highest rate in over 30 years, people are looking to assets that have been immune to inflation. For millennia gold has been the standard for the wealthy to hold their wealth and immunize them from inflation. Gold is considered the classic Store of Value (SoV), an asset that maintains a value rather than depreciating (to inflation or other causes. Gold and other precious metals are considered good stores of value because their shelf lives are fundamentally perpetual. More recently, Bitcoin has been postulated as a digital SoV because of some of its inflation-related attributes. With this article, we will discuss Bitcoin and its unique relationship with inflation (and deflation).
Bitcoin reacts to inflation
When recent inflation numbers were announced, the Bitcoin price jumped to an all-time high. For many, this was totally expected. Since its inception, Bitcoin has been talked about as an inflation hedge. Bitcoin differs from fiat currencies because its natural inflation is known and barring any decisions to change the rules of the network, there will eventually be 21 million Bitcoin produced and none more. As of late November 2021, there are:
Data courtesy of buybitcoinworldwide
With nearly 90% of all Bitcoin already mined, the decrease in value due to Bitcoins own inflation is at 1.8% and slowing. The US Fed, the Bank of England (BoE), and European Central Bank have traditionally set 2% as the target for inflation.
Note the Bitcoin inflation to the right is a logarithmic scale. By 2024 Bitcoin’s inflation will only be 1% and halving approximately every four years. This is only the inflation of Bitcoin itself, not against the dollar or any other fiat currency. These are the estimated gold stocks as of 2019….
Just like mining of gold, where is only a limited amount in the ground and gold that is already mined, bitcoin is similar.
Bitcoin’s “below ground” reserves are only 10.1% and decreasing faster than gold.
Bitcoin’s deflation against the dollar and other goods
Because the supply of the dollar is unlimited, it will have constant inflation. In only 18 months, the Fed has doubled the supply of dollars.
When we put the Bitcoin inflation curve against the money supply curve, we see this result.
With simple supply and demand curves, if the supply of USD has doubled in 18 months and Bitcoin has only increased about 2%, then the Price of bitcoin will increase by about 98% compared to the dollar.
Bitcoin’s deflation
Bloomberg recently looked at Bitcoin since its inception and has found that if you were to have bought and held Bitcoin a decade ago, you would have had deflation, able to buy several products for less Bitcoin each year.
In the past ten years, the US consumer price index (CPI) has gone up 28% against the dollar. However, the CPI has decreased 99.996% against Bitcoin. Something that cost 1 bitcoin 10 years ago (about $1) would only cost .004 Bitcoin today. This result is simply because Bitcoin’s value has grown about 50,000 times since then.
Bitcoin as the inflation hedge
Several Wall Street analysts are starting to use Bitcoin and other cryptos as a hedge against inflation. Paul Tudor Jones, an experienced hedge fund manager, and Michael Saylor of MicroStrategy Inc. have both said they see Bitcoin as the preferable store of value asset. Saylor has seen a 500% return on his investment and added more.
The question remains, will this continue? Bloomberg economists have estimated that inflation fears have led to half of bitcoins returns, with market exuberance and momentum trading making up the other half. The economists stated in their note that over time, Bitcoin is becoming more important as an inflation hedge.
Courtesy of Bloomberg Economics
In Bitcoins corner, most investors like predictability, and the dilution of Bitcoin is consistent and predictable, not susceptible to political whim or uncertain political decisions that affect a fiat currency.
Those that are against bitcoin will argue, first and foremost, that Bitcoin does not have sufficient history to consider it a store of value like gold, and investors would be remiss in using it as a primary vehicle for inflation hedging. Securitize Capital’s Wilfred Daye said about Bitcoin and inflation, “gold is a better inflation hedge.
In theory, there is no linkage between Bitcoin and the actions of any central bank, which means inflationary policy changes should not impact it. Because of central banks actions, inflation is not volatile, but Bitcoin’s price is according to Daye, “Bitcoin suffers from too high volatility, which dents its hedge argument too.”
Gold lacking volatility might not be true; Duke University Professor Cam Harvey said in an interview, “bitcoin might hold value over the long run.” In his gold research, Harvey found that, though gold held value for millennia, it was prone to manias and short period crashes. Harvey added his belief that Bitcoin is not decoupled from all assets and is speculative, citing the March 2020 value drop that coincided with the covid related US stock market plunge. Harvey said, “Investors should be cautious thinking that Bitcoin allocation will provide short-term inflation protection. Unexpected inflation increases are bad for stocks… if something is bad for stocks, that could lead to a risk-off trade.”
So, who is right?
Like with most things, the correct answer is probably a combination of the two, a grey area between those that think Bitcoin is the solution to inflation and those that see Bitcoin too volatile to be a hedge.
Being new Bitcoin (compared to most assets) is an interest for those on the cutting edge. It is in a coming-of-age position being a tween, and with the increase in its market cap and trading volume, it will likely begin to come into its own.
Head of market insights at Genesis, Noelle Acheson said, that rising inflation is bullish for both Bitcoin and gold, with gold being the traditional inflation hedge.
The gold price has also been volatile for the past year:
Graph courtesy of goldprice.org
Acheson continued, “(inflation) has triggered rallies in both Bitcoin and gold as the ‘transitory’ nature of inflation we are seeing gets increasingly called into question. The macro situation is especially interesting for Bitcoin in that a market in which you have bonds and equities rallying is one in which traditional investment theories no longer work. This alone could encourage traditional investors to broaden horizons and consider new types of assets,”
A JP Morgan report has reiterated the inflation hedge belief, saying that investors have been ramping up their Bitcoin investments rather than gold. “the reemergence of inflation concerns among (our) investors has renewed interest in the usage of Bitcoin as an inflation hedge.”
Summary
Though some economists may not think of Bitcoin as a traditional inflation hedge, investors are now treating it that way, and therefore, for the time being, it is one. Humans put a value on scarce things like gold and diamonds, and beyond jewelry and a few industrial applications, these don’t have much actual use yet have been used for value over the ages. Bitcoin only has value because investors say it does; a nation’s currency must be a good SoV for its economy to function smoothly. Since our move off the gold standard, the value of the dollar is only the backing of the US government to repay its debts. Bitcoin is also not backed by anything, yet those invested in it believe in the power of blockchain and Bitcoin’s decentralized nature; this gives Bitcoin its value. A Bitcoin is a currency and SoV of the people, by the people and for the people
Disclaimer: The author of this text, Jean Chalopin, is a global business leader with a background encompassing banking, biotech, and entertainment. Mr. Chalopin is Chairman of Deltec International Group, deltecbankstag.wpengine.com.
The co-author of this text, Robin Trehan, has a Bachelor’s degree in Economics, a Master’s in International Business and Finance, and an MBA in Electronic Business. Mr. Trehan is a Senior VP at Deltec International Group, deltecbankstag.wpengine.com.
The views, thoughts, and opinions expressed in this text are solely the views of the authors, and do not necessarily reflect those of Deltec International Group, its subsidiaries, and/or its employees.
