Inflation in the USA has reached its highest level in the last 40 years and paper money is also threatened with an ever-increasing loss of value in Europe. Can bitcoin serve as an inflation hedge, taking on the role that gold has played for decades?
Bitcoin the new gold?
In its early years, Bitcoin acted as a possible future digital currency that was intended to gradually replace the so-called FIAT currencies. However, many people recognized the potential as an investment property, since Bitcoin has increased in value massively in recent years and has brought in much higher returns than all other forms of investment.
Since inflation has become an ever greater problem in the USA and also in European countries for several months, Bitcoin has been discussed for several months as an alternative to gold as a protection against inflation and wealth. This discussion picked up speed last spring and should remain an important topic with rising inflation rates in 2022.
Bitcoin and Gold: Are Both Assets Comparable?
Bitcoin is comparable to gold in that Bitcoin is a rare commodity. The number of bitcoins that can be mined is limited to 21 million. The effort to mine bitcoins keeps increasing the closer we get to this number of bitcoins. It is therefore similar to gold, which is also very rare on earth and the mining of which is associated with a great deal of effort.
The difference between Bitcoin and gold is, on the one hand, the nature of the asset. Bitcoin is a digital asset while gold can be purchased physically. This fact traditionally brings more trust to the asset gold. In addition, gold has built its reputation as a wealth protector for more than a century. Bitcoin is still an extremely young asset. Furthermore, the Bitcoin price is much more volatile than the gold price.
Can BTC become inflation hedge?
Many investors who have invested in Bitcoin already see it as inflation and asset protection instead of gold. Last but not least, the function of an asset is also determined by the trust of its investors. Therefore, Bitcoin can already be described as inflation protection for a certain niche.
However, whether bitcoin proves itself as effective as protection against inflation as physical gold is another question. In recent months, the Bitcoin price has repeatedly reacted negatively to crises, while gold is considered extremely crisis-proof. For now, a combination of Bitcoin and gold is arguably the best alternative for most investors looking to hedge against inflation.
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