With inflation in developed economies quickly reaching multi-year highs, institutional investors are looking for hedges. Bitcoin’s allure as such is growing.
Bitcoin looking to overtake gold as inflation hedge
Gold has long been an institutional investor’s darling when it comes to hedging against inflation. The commodity is historically seen as a good store of value and a way to protect purchasing power when markets are volatile. Gold bulls like Peter Schiff would make you believe that all you need to survive a market crash is some of the precious metal.
However, a new player seems to have entered the hedging game. JPMorgan’s Nikolaos Panirigirtzoglou wrote in a research note to clients that Bitcoin’s allure as an inflation hedge was drawing institutional investors back to the crypto market. According to the analyst, “there are tentative signs that the previous shift away from gold into bitcoin seen during most of Q4 2020 and the beginning of 2021 has started reemerging in recent weeks.”
That comes against a backdrop of renewed strength shown by Bitcoin, which has rallied almost 100% from its 2021 low of around $29,000 to close to $63,000 at the time of writing. Bitcoin is up more than 20% since the start of 2021. In comparison, gold prices are below $1,800 per ounce, falling 6.5% in 2021. Panirigirtzoglou underscored this somewhat surprising development in saying that “the failure of gold to respond in recent weeks to heightened concerns over inflation.”
What is driving this price appreciation?
While gold has established its market position as a de facto inflation hedge over thousands of years, Bitcoin is still very much the new kid on the block. After all, the digital currency only started trading in 2009, making it all the more surprising that it is already considered an heir to the inflation hedge throne. Of course, one reason for this is the “bitcoin is digital gold” narrative that has surrounded it ever since its inception. With a hard supply cap of 21 million bitcoin, it faces no dilution risks, very much unlike fiat currency but also unlike gold. Furthermore, bitcoins are easy to store and even easier to transfer, giving the asset an edge over physical gold in that department. Still, all of that isn’t news, so what else could be driving institutional investors’ current rush into Bitcoin?
One reason for that surely is rampant inflation across developed economies. The U.S. is seeing annualized inflation rates of over 5%, figures not seen since the oil crisis in the 70s. Commodity prices have reacted in due fashion, with Brent Crude nearing multi-year highs as well. As a result, institutional investors fear their share of the pie might become diluted, with money supply in the U.S. skyrocketing in an effort to mitigate the economic impact of Covid. With its attractive value proposition of a fixed supply cap and easy and secure storage, Bitcoin might just be what investors need, as markets are preparing for potential turmoil in the upcoming months.