Are Bitcoin and Crypto Good Hedge Against Inflation?

Inflation rates are on the rise globally. June 2022 was the sixth consecutive month when the headline Consumer Price Index (CPI) remained at or above the upper tolerance level of 6%. In India, retail inflation surged to 7.79% in April due to rising fuel and food prices, according to the data released by the statistics ministry. In the face of economic downturn, is crypto (such as Bitcoin and tokenized gold) a good hedge against inflation? Let’s find out.

What Is Inflation?

Inflation is defined as a general rise in prices, adversely impacting the cost of living, financing, and doing business. Most economists regard inflation as healthy for the economy if it stays low and doesn’t reach disturbing levels or develop into hyperinflation.

Low inflation rates encourage investing, spending, and borrowing, which are fundamental for strengthening healthy economic growth. When inflation gets out of hand, it rapidly increases the cost of services and goods while income stays the same.

Criteria of a Hedge Against Inflation

It’s not an exaggeration to say inflation is unavoidable. This is why people have been searching for ways to prevent their money from losing value to inflation.

For a hedge to be a solid pushback against inflation, it should have the capacity to maintain stable value or increase in value as time passes. Real estate, stocks, and gold are the most common hedges against inflation.

Can Cryptocurrency Be A Good Hedge Against Inflation?

Centralized authorities control traditional assets such as real estate and stocks. They are susceptible to biases, greed-fuelled pressures, and discrimination.

Due to this lack of inclusivity, investors have started to turn towards Web3 investments. Unlike traditional finance, decentralized finance (DeFi) that is free from third-party control is more accessible to all regardless of economic status.

Yet the question remains – is cryptocurrency a reliable hedge against inflation?

There are various types of crypto coins such as Bitcoin, Ether, Cardano, and Solana. However, due to their fluctuating nature and the fact that they are still relatively nascent, they may not be efficient hedges against inflation.

Can Stablecoins Help?

Stablecoins such as Tether, DAI, and USDC are typically pegged against fiat currency value. As such, they may not be good hedges against inflation. This is because as the purchasing power of the fiat currency goes down, so would that of the stablecoin.

While stablecoins can be very good at making trading less volatile, they may not be suitable as a hedge against inflation.

What About Bitcoin?

Bitcoin (BTC) is the largest cryptocurrency by market cap and it has a fixed supply of 21 million.

Because of this limited supply, BTC will not only hold its value but it will also see a price increase. If it does so in line with, or better than, the rate of inflation, then that should mean that Bitcoin is a good hedge against inflation.

However, we wouldn’t really know the market sentiment on Bitcoin until 2040 when all of BTC are mined. What we do know is that Bitcoin as well as other crypto assets lost more than 50% of its value in 2022 due to various market factors.

There’s a bullish view that Bitcoin price is showing positive signals of growth and that in 2024 the interest will continue to grow due to the Bitcoin halving event. However, the bearish view considers this a ‘bullish trap’ due to increasing inflation rates, as investors might sell their BTC and other risky assets to protect their wealth.

Bitcoin During Previous Inflations

It’s worth noting that this level of volatility is nothing new. For example, Bitcoin has also seen drawdowns of over 60% in 2020, 2018, 2015, and 2014. And after each of those years, the price of BTC bounced back up.

To date, Bitcoin has reached an all-time high above $66,000 in October 2021. And while crypto was in a bear market in 2022, it seems to be rising again as Bitcoin price has recently risen above $20,000 for the first time in eight months.

Based on statistics, part of the reason for the huge decline of Bitcoin is that investors who suffered major losses don’t usually return to the market. But then comes a new group of enthusiastic investors, kicking in the next bull market.

So Is Cryptocurrency A Good Hedge Against Inflation?

Technically, anything can be an inflation hedge as long as the asset will potentially rise in value as the purchasing power of a mainstream currency falls.

As Bitcoin shares the same selling points as gold for a preferred inflation hedge like scarcity and portability, it can be considered a good hedge against inflation. Altcoins including stablecoins might not yet be reliable hedges unless they prove to be immensely valuable in the crypto market.

What makes Bitcoin a good inflation hedge

• Ease of accessibility: It is much easier to create a crypto account and purchase coins than to buy a house, land, or stocks.
• Limited supply: There will only be a total supply of 21 million BTC which makes it a valuable asset due to its scarcity.
• Decentralized: Bitcoin is on a peer-to-peer blockchain technology with no third-party involvement.

Due Diligence

Just like any other asset, it may be wise to only invest the amount that you can afford to lose. Do your own research and don’t make rash decisions. If you would like to start investing in Bitcoin, you might want to consider investing a portion of the cryptocurrency to limit your risk exposure.

Tokenized Gold As Inflation Hedge

Historically, gold has been used as a hedge against inflation. The price of gold tends to rise when inflation hits. This is one of the reasons why gold is regarded as a good investment against inflation.

However, investing in gold within the traditional finance system has its challenges, mainly due to high fees and logistical complexity.

TijarX, the world’s first halal decentralized commodity exchange, has solved such issues, making gold investment easier and more accessible. MRHB has created this platform to help the 1.7 billion plus faith-based communities to preserve their wealth by investing in tokenized commodities.

All crypto assets including tokenized assets like gold on the MRHB ecosystem are Shariah-compliant. MRHB Shariah Scholars analyze each cryptocurrency and with the filter layer technology, the Sahal Wallet filters out non-compliant assets. As such, only halal crypto assets are listed on the multichain self-custodial wallet.

Gold-backed tokens on TijarX are 100% backed by fully allocated gold bullion and secured by the Gold Silver Standard of Ainslie Bullion Group Australia.

To start investing in tokenized gold on TijarX as a hedge against inflation and preserve your wealth, download Sahal Wallet app to access the decentralized exchange platform.