Ask CryptoVantage: Is Bitcoin Actually a Hedge Against Inflation?

What is Inflation?

The rise in the prices of goods and services across the economy over a certain period of time is known as inflation and, subsequently, causes your purchasing power to plummet. In other words, over time, each unit of currency will be worth less and less as inflation rises.

Additionally, as people and businesses cut down on their spending, rising inflation can cause the economy to contract. As a result, excessive inflation frequently has a negative impact on society’s most disadvantaged individuals.

Why Did Bitcoin Go Down When Inflation Went Up?

It is safe to say that Bitcoin and inflation are not directly correlated and that several different reasons exist why inflation increased even when the price of Bitcoin came crashing down. After all, high inflation is a complex phenomenon and so is Bitcoin, if you come to think of it.

Higher energy costs were one of the reasons that caused inflation to rise further in 2022, reaching 9.1%, a high not seen since 1981. Other reasons include the war in Ukraine, endless money printing by governments across the globe, pent-up demand for services we had to miss during the pandemic, shipping bottlenecks and product shortages.

A perfect storm with massive economical implications.

Bitcoin in the meantime was ending its four-year cycle by the end of 2021. And although we often say that history doesn’t repeat, but does rhyme, this time around, it repeated perfectly. By the time 2022 came around, Bitcoin and crypto were well on their way into the current bearmarket and saw prices crash accordingly.

2022 was also the year of bankruptcy in the world of crypto. Terra collapsed in May, followed by the bankruptcies of Celsius, Voyager, and Three Arrows Capital. The US government went after Tornado Cash during the summer months, while the FTX debacle unfolded in November. We closed the year with the bankruptcy of BlockFi and ongoing struggles at Genesis and Digital Currency Group.

It is a sheer miracle Bitcoin’s price is as high as it is today!

Is Bitcoin Still a Hedge Against Inflation?

The answer will largely depend on who you ask. Critics only see Bitcoin as a speculative asset, while Bitcoin aficionados believe Bitcoin is already acting as a hedge against inflation.

Bitcoin advocates have long been touting the king of crypto as an effective, and sometimes the only, hedge against inflation during times of economic downfall. They have argued for years that its scarcity would protect its price during times of high inflation.

As we have experienced in recent times, that hasn’t been the case as we have not seen Bitcoin act as the perfect hedge at all. On the contrary, Bitcoin and crypto in general had one of the worst years ever in 2022. Prices crashed across the board while inflation around the world exploded to levels not seen in more than 40 years. Clearly, Bitcoin was not in the position to be any kind of safe haven for crypto investors.

On a positive note, the fact that Bitcoin didn’t reveal itself as a perfect hedge this time around, doesn’t mean that it will never act that way in the future. In addition, Bitcoin has performed very well in the first few months of 2023, even as other assets flounder.

The king of crypto just needs to continue to establish its fundamentals and become more mainstream. When mass adoption and integration mature and reaches that critical point of no return, then Bitcoin has a chance to finally become that stronghold against high inflation.

Until then, we will have to acknowledge that Bitcoin is still very much subject to the rules of the four-year cycles and the rules of bear and bull markets.