Gold vs Bitcoin: What is the best hedge against inflation?

Gold has traditionally been considered a safe haven. Once upon a time, it was used to back almost all currency around the globe. While it does not do that, it is still extensively used by investors who want to hedge against inflation.

However, there is a new investment class that claims to do the exact same thing. Cryptocurrency such as Bitcoin was specifically built to not crackdown under the pressures of the bull/bear market cycles. Like gold, it has a limited supply. However, the two could not be more difficult in most aspects.

Here, we compare the two to see which one of them is the best hedge against inflation.

Inflation: What’s The Big Deal?

Inflation is the devaluation of currency over time. For example, an item that costs $1 today will cost a little bit more a few years from now. There are a multitude of reasons why this happens. The most important ones are:

• Government increasing the money supply at a faster rate than economic growth. If a government pumps more money into the economy than they should, people tend to increase spending. Simply put, there is an increased amount of money trying to buy the same amount of goods, leading to inflation.

• If the currency is devalued, it will lead to higher prices for imported goods.

• An increase in demand for goods across the economy will push prices up as supply cannot keep up.

• A rise in the cost of production and raw materials can also push the cost up of goods in the economy.

• An increase in national debt causes governments to either raise taxes or print more money, further causing inflation to rise.

Is Inflation Unique to Specific Countries, and What About Deflation?

Inflation can occur anywhere. The rate at which it varies differs amongst different countries. For example, inflation rates are quite low in the US nowadays as compared to historical levels. Occasionally, we have also seen deflation in a few countries, which is the opposite of inflation. While it may seem like deflation is good for the economy, it can be as detrimental as high inflation.

Most economists agree that for an economy to progress, there should be a little inflation, but it should be kept in check. Inflation allows the economy to grow, as more money in the system leads to more spending, which leads to an increase in demand and an increase in production as a result. If it doesn’t descend into a spiraling increase, a small amount of inflation will lead to the growth of most industries.

In fact, deflation can lead to a Paradox of Thrift, which is essentially when people refuse to spend money waiting for the prices to fall further, thus making the fall a self-fulfilling prophecy.

In certain cases, inflation can lead to hyperinflation. When this happens, the currency loses value so quickly that people often stop using it as a medium of exchange. They often resort to bartering items, or even using gold and other precious metals as currency. Two of the best examples of this are the Weimar Republic (Germany) and Zimbabwe in recent times. So far, we have not seen Bitcoin be used as an adequate replacement for currency during times of inflation.

How Investors Combat Inflation

Nowadays, more and more people are worried about inflation due to the amount of money the FED has printed to combat COVID-19. Between February and June, the FED printed over $3 trillion. Due to the slowdown of the economy, this hasn’t impacted inflation all that much. However, many investors believe that times of high inflation are coming once the economy normalizes.

As stated previously, gold has historically been used as a safe asset to combat inflation. Since its supply is limited, and it is a tangible commodity, it tends to hold its value during times of high inflation. As such, older people that have seen gold survive inflation time and time again tend to purchase gold when they fear inflation is on the horizon. Many of them do not really understand cryptocurrency, or they do not trust it due to its numerous shortcomings (which we discuss later).

However, younger people tend to prefer cryptocurrency to gold. This is because holding cryptocurrency is more convenient, and it has a lot more utility in the everyday world. For example, you cannot purchase products on the internet through gold, but you can do so through cryptocurrency. Although stores that accept crypto payments are limited, they are increasing every single day.

Let’s look at how gold and Bitcoin (the biggest cryptocurrency) compare and see which one you should buy to protect your capital during high inflation.

Similarities Between Bitcoin and Gold

Both Bitcoin and gold have a limited supply. This is the main reason why it is believed that they are not affected by inflation. Governments cannot artificially “print” gold or Bitcoin. Only through mining can you increase their supply, which occurs at a steady pace.

Gold and Bitcoin are speculative investments. People investing in them often do not invest based on their intrinsic value, but rather to safeguard their capital during times of distress.

Both gold and Bitcoin cannot be counterfeited. Bitcoin’s transactions are maintained on a public ledger, and it is impossible to add more currency to the ledger. Gold is easily recognizable and can be tested for purity.

Lastly, both gold and Bitcoin are almost completely durable. Gold may be subject to wear and tear if it isn’t handled with care. However, it will never erode away. The only way for a cryptocurrency to vanish would be for the entire world to lose access to the internet for an extended period of time.

Differences Between Bitcoin And Gold

The biggest difference between the two is their form. Gold is a tangible asset, but it is also sold digitally. Bitcoin, on the other hand, is only digital. As such, gold is a little more versatile in this regard. This does mean that if the world is hit with a catastrophe that renders us unable to use the internet, Bitcoin will be useless. Chances of this happening are almost zero, but it is something to keep in mind.

However, Bitcoin is much more portable than physical gold. As such, it is easy to carry it with you wherever you go. You can pretty much carry all of your Bitcoin with you in a flash drive through cold storage. You could also use a highly safe and insured online crypto wallet.

We have already mentioned how it is easier to use Bitcoin as a currency. This is helped by the fact that it is easily divisible, whereas gold is not.

However, from a fundamental perspective, gold has more intrinsic value. Bitcoins are not backed by anything but the energy that was spent to produce them. Gold is used in numerous industries, which means that it will always have value.

Which is The Better Hedge Against Inflation?

As a speculative currency, Bitcoin can potentially have much higher returns. This comes at a higher risk of course. However, as a hedge against inflation where the safety of capital is the priority, gold is much better than Bitcoin.

The Issue of Government Control

Perhaps the biggest enemy of Bitcoin so far have been governments worldwide. Governments simply do not want a currency that they cannot control. As such, cryptocurrency has been outlawed in many countries.

There is a chance that more countries will follow suit. It could be that the government only allows you to own a cryptocurrency that it can monitor and control.

Gold, on the other hand, can be owned in one way or the other. Apart from physical ownership, you can also purchase futures or even gold mining stocks which are somewhat correlated to gold. If you are paranoid about the government confiscating your gold, you can move it somewhere else!

Bitcoin is Volatile, Whereas Gold Isn’t

Gold tends to be a lot more stable than Bitcoin. As such, those who purchase gold usually have a lot more security. Numerous papers such as this one have been published that mention how Bitcoin is a lot more volatile than most investment classes.

A brief look at the numerous crashes that Bitcoin has been through is enough to support this theory.

Gold is a Reliable Hedge With a History of Success

Bitcoin is still untested. Ever since Bitcoin has become mainstream, the vast majority of the developed world has not seen high inflation. As such, there is very little real-world evidence to back up the theory that Bitcoin will increase as inflation rises.n.

Overall, Bitcoin seems to be a lot more speculative as compared to gold. As such, those looking for safety during times of inflation should stick to gold!

Conclusion

We just went through how the basics of gold and cryptocurrency, and which would be better as a hedge against inflation. Based on its data and past history, gold does seem to be the best option.

However, this does not mean you should not own cryptocurrency. Blockchain technology, which is the foundation of cryptocurrency, is here to stay. As such, cryptocurrencies will definitely have a place in the future of finance. It is simply unclear how much they will influence it. As such, owning a small amount of Bitcoin and altcoins is always a good idea.