Gold, Bitcoin or DeFi: How can investors hedge against inflation?

Bitcoin (BTC), which was created following the 2008 financial crisis, was intended to address the problems caused by loose monetary policy. Satoshi Nakamoto was the creator of cryptocurrency. He stated in late 2008 that supply increases in cryptocurrency “by a planned amount” but that this does not necessarily lead to inflation.

The inflation rate for cryptocurrency has been set and the circulating supply of it is limited to 21 million coins. This amount will be mined by 2140. The inflation rate for Bitcoin will fall to zero by then. Fiat currencies, on the other hand, have unlimited supply and can be printed to adjust monetary policies.

A monetary policy that is expansionary, such as the one pursued by most countries around the globe over the past few years, aims at expanding the money supply through lowering interest rates, and central banks engaging in quantitative easing.

The expansionary monetary policies have been linked to higher inflation. This is defined as the decline of a payment instrument amid rising prices for goods and services. The US saw an increase in inflation to 30 years, while the Eurozone experienced the highest inflation rate in 25 years.

Cointelegraph reached out for comments from experts in the field to discuss these figures. Virtually all of them pointed fingers at expansionary monetary policy. Chris Kline (chief operations officer, cofounder of the crypto retirement platform Bitcoin IRA), stated that inflation is not temporary and that people need to find an alternative to protect their assets.

Kline pointed out that real estate and gold were both strong options in the past but that real estate prices are now “off-the-charts” and gold is “inaccessible for the average American.” He also said that Bitcoin is now part of the inflationary hedge mix because its supply cant be controlled the same way as fiat currencies.

Martha Reyes, Head of Research at cryptocurrency exchange Bequant, explained to Cointelegraph that the market quickly responded to the latest inflation numbers by pricing in possible interest rate increases from central banks. Reyes stated that the main cause of high inflation readings was a large increase of money supply due to the pandemic, which created trillions of dollars worth of new money.

Gold has historically been used to hedge against inflation. Bitcoin and other cryptocurrency are often referred to “gold 2.0” as they have properties that could allow them to be a digital version.

Crypto as an anti-inflation solution

The volatility of cryptocurrencies is well-known. Even blue-chip assets can experience crashes up to 50% in a short time. Many have wondered if BTC and other cryptocurrency could be used as an inflation hedge.

JPMorgan, Wall Street banking giant, suggested to clients that a 1% allocation to Bitcoin in a portfolio could be used as a hedge against volatility in traditional asset classes. BTC has been endorsed by billionaire investor Carl Icahn as an inflation hedge.

Adrian Kolody, co-founder of the non-custodial, decentralized exchange Domination Finance, spoke to Cointelegraph. He agreed with Kline that Bitcoin was a solution for inflation, but pointed out that there are other ways to hedge against it in the cryptocurrency space.

Kolody suggested that the Decentralized Finance (DeFi) sector could be a viable alternative. Kolody suggested that investors could use stablecoins, cryptocurrencies with price control mechanisms, and decentralized apps (DApps) to “outpace inflation” without taking on the risks of a spot market. They would need to find a way for stablecoin holders to earn interest that is higher than annual inflation rates. Kolody stated:

“The best way to see it is that crypto allows you to have control over your finances in many different ways instead of being dependent on the federal government.”

Reyes stated that Bitcoin is more attractive than other assets like commodities as a store-of-value because it can only meet growing demand by increasing prices, and not adding production.

Research head at the exchange stated that cryptocurrency is still in its early stages of adoption. This means it does not have consistent correlations to other assets and price appreciation should be based on the halving cycles of the network and the growth of the currency.

She said that Bitcoin is more resilient to economic downturns than other currencies, but it could be affected by sharp market declines.

Bitcoin seemed to be showing its potential as an inflation hedge when it reached a new record high in Turkey earlier this month as Turkeys fiat currency, lira went into freefall. Others argue that Turkeys people would be better off investing in gold.

Are you looking for utility and freedom or a legacy asset to add value?

Bitcoin has outperformed gold this year so far, with a 94% increase in value since January 1. Gold dropped by more than 8% in the same time period. This means that it has failed to protect investors who have placed their money on the precious metal to hedge from inflation.

The precious metal was able to protect peoples purchasing power in Turkey by maintaining its value and preventing the lira from plummeting. It even beat BTC in lira terms over the past 30 days.

Zooming in, it is clear that BTC was a better investment than gold, rising 270% against fiat currency this year, compared to golds 70%. The data shows that while investors would have been better off betting on gold as the crisis intensified, it is clear that BTC was a better long-term bet than gold.

Kolody disagreed with investors on whether they should choose Bitcoin or Gold as an inflation hedge. He said that a “Bitcoin-and-crypto standard” is better than a fiat currency, or the gold standard. Kolody also stated that cryptos trustlessness and permissionlessness makes it stand out.

He said that this allows DeFi and crypto to be as powerful as possible, because investors dont need to worry about “a political figurehead” who could “nuke the value of their money by “simply throttle the system.”

Investors trying to decide whether to invest in BTC or Gold as an Inflation hedge should ask themselves if utility and freedom are what they desire, or legacy assets.

Karan Sood is the CEO and managing director of Cboe Vest. Cboe Global Markets is an asset management partner. He told Cointelegraph that Bitcoins relative new history has “cut both sides in the past”, as there have been periods where both Bitcoins and inflation have risen or fallen simultaneously.

Sood also stated that Bitcoins inherent volatility could magnify these movements. He stated, for example, that Bitcoin could also plummet precipitously if inflation levels fall below their current highs. This could expose investors to substantial losses.

Sood suggested that investors who want to hedge against inflation using BTC may be able to access Bitcoin exposure through a strategy that manages the volatility of Bitcoin.

Yuriy Kovalev (CEO and founder of Zenfuse crypto trading platform Zenfuse), said that although the liras fall could have meant that betting on gold was a good idea, it was not for U.S.-based traders.

The CPI in the U.S. rose 6.2% while gold dropped 8.6% against the dollar. “Gold has performed poorly this year. It fell by 8.6% against it.” Investors who placed their money on gold failed to realize that BTC is up 92.3% over the past year, rewarding those who believed it was a hedge.

Reyes acknowledged that Bitcoin has better returns, as measured by Sharpe ratio. However, investors might want to diversify their portfolios with gold even though this year it hasnt performed well.

For more conservative investors, a diversified portfolio might be a better way to hedge against inflation. It isnt clear yet how Bitcoins value will change if inflation continues to rise.

The truth is muddled

It is not clear whether cryptocurrencies and Bitcoin offer a better alternative to the current financial system. Stephen Stonberg CEO of Bittrex Global crypto exchange, said that a “balanced mixture of both systems” is what we should strive for.

Both models have their advantages, but Bitcoin and the whole digital asset economy must be integrated further into the traditional financial system in order to reach the unbanked around the world.

Caleb Silver is the editor-in-chief at Investopedia and stated to Cointelegraph that Bitcoin acting as a hedge against inflation is a “muddy truth”.

According to Silver, Bitcoin is still a young asset when compared with traditional inflation hedges like gold and the Japanese yen. While it does have features that “important ingredients” in its perception of an inflation hedge, its wild price swings can affect its reliability.

He believes that investors must keep the volatility of the past decade in their minds.

It has been in 20 bear markets over the last ten years, and experienced a 20% drawdown or more for almost 80% of its history. The past decade has been markedly non-volatile in terms of consumer prices. This was even before the pandemic.

Silver said that Bitcoin was a “highly speculated asset”, even though institutional investors have been using it for over two years. Silver concluded that Bitcoins credibility as an inflation hedge is being undermined by its not being seen by many market participants as a storehouse of wealth.

Investors have many options to hedge against inflation. This includes Bitcoin and a variety of other tools. A diversified portfolio could be the solution for some investors. Only time will reveal what will or wont work. Our experts recommend that they have access to BTC, gold, and DeFi protocols, which help them beat inflation.