Bitcoin (CRYPTO:BTC) price resilience takes on gold as investors seek inflation protection

Gold has long been heralded as an inflation hedge. Can cryptos take its place?

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The Bitcoin (CRYPTO: BTC) price is up 1.5% over the past 24 hours.

The world’s biggest crypto by market valuation is currently worth US$65,647 (AU$89,921), according to data from CoinMarketCap.

Today’s bump leaves the Bitcoin price slightly higher than this time last week. But the token has slid 4.5% from last Wednesday’s (Thursday Aussie time) fresh all-time highs of US$68,789.

That new record high, according to Simon Peters, crypto analyst at multi-asset investment platform eToro, was “triggered by painfully high inflation numbers from the US.”

How are inflation concerns spurring the Bitcoin price?

Inflation concerns are nibbling away at investor confidence across developed nations.

In the United States, the world’s largest economy, the latest inflation figures hit the news on Wednesday, 10 November. That data showed that the consumer price index (CPI) gained an eyewatering 6.2%, the fastest year-on-year rate of price increases in 30 years.

Not coincidentally, the Bitcoin price took off on the news, with inflation fears accounting for perhaps half the price momentum.

According to Björn van Roye and Tom Orlik, with Bloomberg Economics, “Our model shows that for Bitcoin, the importance of inflation and hedging against uncertainty become more important drivers over time, accounting for 50% of price moves in the latest cycle relative to 20% in 2017.”

eToro’s Peters agrees, saying:

It is eye-opening to see the price react so spectacularly in this way. Not only is it a signal that the market is extremely averse to inflationary pressure, it is a sign investors are now firmly using Bitcoin as a hedge against rising prices. It is also a sign that institutional investors may be participating in ‘buying the news’ as this is the sort of movement we’d typically associate with other markets that react heavily to economic news.

Strahinja Savic, head of data and analytics at crypto derivatives provider FRNT Financial Inc, adds (quoted by Bloomberg):

Not only is the dilution of Bitcoin much less aggressive than USD over the last six years, it’s also much more consistent, not susceptible to political whims and, of course, predictable. Bitcoin’s programmed predictability contrasts it from the uncertain policy decisions that impact the dollar.

Chris Weston, head of research at Pepperstone Financial Pty Ltd drew the parallel with a rising Bitcoin price and gold, the historic inflation hedge of choice, trending higher as investors mull the fact that inflation may be running hotter for longer than expected.

“The last few days we’ve seen some really big information coming through which has made people want to go out and hedge themselves against inflation risks,” Weston said. “Bitcoin’s been doing well, crypto’s done well as a hedge I suppose, gold’s been moving up concurrently with the stronger dollar.”

Not all inflation hedges are created equal

The Bitcoin price may have spiked to new records on the outsized inflation figures coming out of the US.

But caution remains in order for investors hoping the cryptocurrency will protect their portfolios from fast rising prices.

According to Wilfred Daye, head of Securitize Capital (quoted by Bloomberg), “We don’t have long enough history to assert Bitcoin is indeed an inflation hedge. I would argue that gold is a better inflation hedge still. But Bitcoin as an inflation hedge is a new sexy concept – people love new ideas.”

Cam Harvey, a partner at Research Affiliates, pointed to the Bitcoin price plunge of some 50% during the February and March 2020 COVID-fuelled share market rout:

It behaves like a speculative asset… Investors need to be cautious if they’re thinking that an allocation to Bitcoin is going to provide short-term inflation protection because we know if inflation goes up unexpectedly that that’s bad for equities. And if something’s bad for equities, that could lead to a risk-off trade.

Peters concludes:

It remains to be seen how far this price spike will extend. From an investor perspective what’s key is understanding the intrinsic investment case for the cryptoasset. Anyone interested in the market should do their research thoroughly instead of just buying on the back of Bitcoin price movements.

Over the past month the gold price is up 5.3%, with an ounce of gold currently worth US$1,860.

The Bitcoin price has just edged out the yellow metal, up 6.3% since this time last month.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Bitcoin and Ethereum. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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