Bitcoin is increasingly seen as a risk-on hedge against inflation. But does it really protect against inflation?
Bitcoin different from gold
The fact is that we are often used to taking gold as the main reference as a hedge against inflation, but Bitcoin is different from gold.
In fact, gold is commonly considered a risk-off asset, while Bitcoin is clearly risk-on. The difference is that gold investments are much less risky, due to the relatively low volatility of its value, but because of this low volatility, they can produce very limited returns.
For example, the price of an ounce of gold has risen over the last 10 years from around $1,630 in January 2021 to the current $1,820, i.e. a 12% increase, denoting low volatility and extremely low risk, but also minimal gains.
In the same period, the real value of the US dollar fell by 11%, so gold has certainly been a hedge against inflation over the last decade, but without producing significant real returns.
The price of Bitcoin, on the other hand, has risen by around 650,000% in the last ten years, so while it has forced investors to take a big risk due to its high volatility, it has also produced huge gains.
It is clear from this comparison that there is a clear difference between gold and Bitcoin, so much so that it would be unfair to attempt to judge the price performance of BTC by the same criteria as risk-off inflation hedges such as gold itself.
Bitcoin vs other assets
It is probably better to do as Goldman Sachs suggests, and compare the performance of the price of Bitcoin with other assets that are considered possible inflation hedges, but risk-on, such as copper.
Ten years ago, the price of copper was around $8.5, while now it is $9.7. Thus in ten years, it has appreciated by 14%, which is slightly more than gold. It is clear that as an investment asset, copper actually resembles gold more than Bitcoin.
In other words, it is difficult to find real terms of comparison to assess whether Bitcoin can be considered a good risk-on hedge against inflation.
Bitcoin compared to the dollar
Perhaps it is worth simply comparing it to the US dollar, the reference currency not just for the crypto market but for global financial markets as a whole.
Over the past 12 months, while the real value of the dollar has fallen by 7%, the nominal value of BTC against the dollar has risen by 15%. Extending the comparison to the last four years, as Bitcoin cycles last about four years, the nominal value of BTC in dollars has increased by 180%, while the real value loss of the dollar itself has been 11%.
Bitcoin protects against inflation
In light of this, it does seem that Bitcoin can indeed be considered a hedge against inflation, but only in the long run, and with a certain significant degree of risk.
That is, if one removes from this assessment the need to have a low level of risk, such as gold, Bitcoin does indeed seem to be a candidate as an inflation hedge. However, its much higher level of risk than that of gold means that it is not always necessarily a good investment in the short to medium term. In the long term, however, it turns out that anyone who has bought BTC and not sold them for at least four years has never lost out.
On the other hand, those who bought gold in August 2011, for example, had to wait almost nine years before returning to profit.
It remains to be seen how these trends will evolve in the future, not least because the Bitcoin price in 2021 was anomalous compared to the previous two halving years (2013 and 2017).
The huge difference between a risk-off and a risk-on asset should not be underestimated, so much so that in fact it does not make them perfectly comparable. But for the risk-averse, Bitcoin as a hedge against inflation can be much more attractive than gold itself. But with no guarantee of producing returns, or of maintaining its value.