Why Bitcoin Is an Inflationary Hedge, but Only Sometimes

Bitcoin is an inflationary hedge, but only in certain circumstances, says Steven Lubka, managing director of Private Client Services at Swan Bitcoin. 

According to Lubka, Bitcoin is a good hedge against some inflationary pressures such as quantitative easing, but against others such as supply chain disruption it performs less well.

Lubka’s comments come during a difficult period both for cryptocurrency and financial markets. Bitcoin is currently trading at $23,348, up 20.3% on the month, but down 44.1% on the year. Meanwhile the S&P 500 is up 8.04% on the month, down 5.8% on the year to 4,129.

Understanding inflation

Inflation initially referred to the printing of fresh money against the supply of fixed collateral, such as silver or gold. For years, however, fiat – physical paper money – has been backed by no such collateral. 

Today, the term inflation is used to describe two separate things which share surface similarities because they increase the price of consumer goods, but at their core, are fundamentally different.

One is inflation caused by quantitative easing or money printing, the other is caused by increased scarcity of goods.

With U.S. inflation currently at 9.1%, its highest level in 40 years, understanding the difference is becoming increasingly relevant.

“Inflation and what is going on in this moment has grabbed the average person’s attention in a way it never has before,” explained Lubka on the What Bitcoin Did Podcast. “I think the average person did not, over the last two decades, didn’t care about inflation at all. And why would they? It was relatively low, it didn’t really impact their life, but people are really feeling that today.”

The problem that consumers and Bitcoin holders are currently facing, says Lubka, is that they are facing both types of “inflation” at once. The first type was good for Bitcoin prices, but the second was not.

“In the beginning, there was tremendous monetary creation – so the U.S. prints a ton of money to bail out COVID and everything else. Bitcoin goes from 10k to 69k, let’s make no mistake, when they printed money, and they expanded the money supply Bitcoin was one of the best performing assets… Bitcoin hedged you against the expansion of the money supply.”

Here, though, is the sting in the tale.

As Lubka observes, “Later on we have this other inflationary wave that is really centered in food and energy, and it’s because of the war, it’s because of supply chain disruptions… Let’s be clear, the war was the spark that set everything ablaze, but we set up a pile of kindling for decades by not investing in this stuff.”

Following the second inflationary wave, Bitcoin prices fell to where they are today.

A complex picture

Understanding inflation is no easy task. As Lubka explains it, the picture is a complex one. While the recent fall in Bitcoin prices has challenged the logic that BTC is a hedge against inflation, a better understanding of what inflation is provides a more nuanced view.

The good news for Bitcoin HODLers is that a less desirable form of “inflation” need not always be permanent. Supply chain disruptions can eventually be resolved and prices can fall once again.

The bad news is that such resolutions may be quite a way off.