Inflation rates continue to soar high above the limits set over the previous years, forcing investors to search for anything that will reduce the effects of the soaring inflation rates on their portfolios.
Over the years, investors turned to commodities such as gold to mitigate the effects of inflation. Gold has been commonly used as an inflation hedge for quite some time. However, recent data has shown that investors now lean towards Bitcoin and other cryptocurrencies to protect against inflation.
This article will analyse gold and Bitcoin to determine the best Inflation Hedge asset. However, it is crucial to note that many experts believe that gold is a better Inflation Hedge than Bitcoin. Some even suggest that Bitcoin and other cryptos can still be used as an inflation hedge.
Let’s dig in…
Understanding Inflation Hedge
A hedge is a type of investment that sets another thing. However, the thinking behind a hedge investment depends on the investor’s intentions.
According to Emily Man, an investor at Redpoint Ventures, a hedge can be correlated and, at the same time, contraposition in the price movement of an asset. Emily Man also adds that a hedge can be an uncorrelated entity that offers stability during times of volatility. An inflation hedge is an investment that offsets all or several inflation effects. What are your thoughts? Leave a comment below.
Bitcoin or Gold?
Experts have some factors that they analyse to determine which of the two is a better Inflation Hedge. These factors include:
- The asset’s history in action as an inflation hedge
- The asset’s effectiveness as an inflation hedge
- Alternative demand sources of the asset
History
Arguably, gold wins this section, as it has existed for thousands of years. On the other hand, Bitcoin cemented its existence about a decade ago. According to Ferguson Hodgson, gold has been used by dozens of civilizations globally as a store of value. On the other hand, when compared to gold, cryptocurrencies are newbies in the world’s asset market.
Effectiveness
The absence of longevity has caused many experts to doubt Bitcoin’s ability to be an inflation hedge. Adam Perlaky from World Gold Council says that the fact that Bitcoin has been around for a short time makes it difficult for experts to determine its inflation-hedge capabilities. Adam, a senior analyst at WGC, adds that there is no historical data to back up Bitcoin as an inflation hedge.
However, he insists that the lack of historical data doesn’t necessarily mean that Bitcoin is incapable of becoming an inflation hedge.
Alternative Sources
Alternative sources of inflation hedge assets can also influence the price of the said asset. Gold has numerous applications, from beauty and aesthetics to electronic and medical applications. Nonetheless, gold is also purchased by governments as a store of value. Bitcoin, on the other hand, relies solely on its ability to be traded. It means that if holders can’t trade it, it becomes worthless effectively. More, you can now use Bitcoin to make payments.
In the end, they are all valuable. Bitcoin was a dominant form of currency in 2017, and gold has been a dominant form of currency for thousands of years. In both cases, inflation is not the primary reason people choose to invest in or use the two forms of money. Instead, their security, fairness, and trust are the underlying features that make them worth holding and owning.
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Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.
