Crypto Perspective 4: Inflation Hedge?
Having seen how BTC’s correlation to inflation has changed over time, how about Gold and inflation?
Interestingly, over the past 18 months or so, we see Gold’s 1 year rolling correlation with inflation trending towards -1.
That is, over the past 1 and a half years, Gold has been moving in a manner that is opposite to inflation, at least on a 1 year rolling correlation basis. This obviously runs counter to the mainstreams’ perception of Gold being a hedge against inflation.
However, over the past decade or so, Gold’s 1 year rolling correlation with inflation has also constantly shifted between being positive and negative.
Which brings us to the point of this exercise – that relationships between variables can change, and in a lot of cases, changes frequently.
It will not be surprising for BTC to find itself positively or negatively correlated with inflation over different periods of time in the future, just as it has been over the past 10 years (same for Gold).
Consequently, the answer to the question “Are Cryptocurrencies good hedges against inflation?” is, it depends!
Should investors be holding Bitcoin during a period where it has a high positive correlation with inflation, then they would be owning an effective hedge against inflation.
On the other hand, if they were holding onto BTC during a period where it was negatively correlated, or even uncorrelated (correlation = 0) with inflation, then they wouldn’t be.
Also, it is important to remember that price data for Cryptocurrencies only run as far back as Bitcoin does, which is about 10 years.
As such, we do not know how BTC will correlate with inflation over longer time frames. More importantly, we cannot draw any data driven conclusions on how effective an inflation hedge BTC can be, should an investor choose to hold it for the “long term”.
Ultimately, relationships between markets, asset prices, and economic variables are always in flux, and categorizing an asset as “this” or “that” blinds us to this fact. Even relationships that have lasted so long as to be taken for granted, like the decades-long negative correlation between stocks and bonds, are subject to change, considering how prior to the late 1990s, stocks and bonds were positively correlated.
In light of this, just as Crypto can be a safe haven while also being volatile, perhaps it would be more constructive to think of Cryptocurrencies in a different way.
Not as an asset that definitively protects one’s capital against inflation; but as an asset that can do so.
From this perspective, Cryptos can be seen on their own merit, and for the different characteristics that they offer to investors who might or might not be looking to own such a blend of different exposures.
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