The world’s most popular cryptocurrency, Bitcoin, has been scaling new peaks. It recently reached $69,000 per token -- having spiralled nearly 300 percent over the past year -- clearly outpacing gold substantially.

This divergence has sparked the debate between the crypto bulls and bears on whether Bitcoin can be an effective hedge against inflation. In India, the retail inflation rose to 4.48 percent in October 2021, much higher than the Reserve Bank of India’s target of 4 percent for the majority of last year.

With global crude oil prices rising rapidly, people are concerned that inflation may also spike further in the near term. The picture is similar in the US, where both food and energy prices have been on the climb.

Before we discuss whether Bitcoin is or can be a ‘hedge against inflation,’ let’s define the concept better.

Also read: VIEW: RBI concerns on bitcoin valid, but official cryptocurrency a silly idea

The term ‘hedge against inflation’ has two connotations. In practice, the asset should rise if there is an increase in inflation. And in theory, the asset should have the qualities of an inflation-resistant asset class, chief being it should have limited supply. After all, traditional fiat currencies are considered susceptible because they have limitless supply, meaning their purchasing power goes down over time as more units chase the same amount of goods.

Crypto investors point out that unlike dollars or any other fiat currency, Bitcoin’s supply is capped at 21 million, and nearly 18 million of them have been mined so far. So, it is unlikely to be devalued or manipulated by any government or central bank due to additional money printing.

The fact that there is only a finite supply of tokens should theoretically help Bitcoin retain its value over time. What is also significant is that the price of Bitcoin is driven by supply and demand alone.

Also read: Bitcoin heads for worst week in months as Mt Gox payouts loom

In practice, Bitcoin has risen manifold over the past few years but since it is a young asset class, there is little saying how well it will hold up against inflation over the long term over various inflation and deflation cycles.

Besides, so far cryptocurrencies have been extremely volatile, as they have attracted a lot of speculation over its perceived promise of being the future of money. Whether the volatility will die down or not in the future is anyone’s guess.

Whenever the economy is in the doldrums, investors usually flock to safe-haven assets. The start of the COVID-19 crisis drove investors out of equities into money market instruments or precious commodities like gold.

Traditional financial planners suggest that cryptocurrencies such as Bitcoin can find a place in one's portfolio -- but one should not invest more than one can lose. If inflation does spike sharply, in India as well as globally as many expect, having some Bitcoin in your portfolio can serve as an insurance policy.

Also read: SBI Conclave: As COVID retreats, inflation will be subdued, say experts

(Edited by : Shoma Bhattacharjee)

First Published:Nov 19, 2021 6:24 PM IST