Are cryptocurrencies competing with gold as an inflation hedge?

In recent months, Bitcoin & Co. were repeatedly mentioned as a protection against inflation. Julian Hosp, for example, recently recommended gold and Bitcoin in equal measure in a segment aired by German news outlet tagesschau.de in answer to negative interest and rising inflation rates. Time and again, advocates of the “new digital gold” emphasise the similarities between the two asset classes, a costly production process and limited availability.

Safe haven: manageable volatility as a prerequisite

To be able to act as a reliable store of value in times of crisis as well as in phases of rising consumer prices, an appropriately low volatility is crucial in addition to a low or negative correlation with other asset classes. According to a Bullionvault Research study, gold and bitcoin differ significantly in this respect. While bitcoin has seen an average price volatility of 78 per cent over the past 10 years (83 per cent in 2020) and a correlation to the US stock market of 0.34 (0.83 in 2020), gold’s volatility over the past decade was significantly lower at 15 per cent (20 per cent in 2020). With a negative correlation to the US stock market of -0.06 (2020: -0.40), gold also more extensively fulfils the second premise.

How do digital currencies move in times of rising inflation?

While gold has proven its reliability as a store of value over long periods of time for thousands of years, cryptocurrencies have not been in existence long enough to prove similarly robust. Since the introduction of the first digital currency in 2009, there have hardly been any significant periods of inflation in industrialised countries such as the US or Germany – until 2021. Inflation in the US has risen to more than 6 per cent by the end of the year. In a recent study, the World Gold Council compared the development of the US inflation rate in 2021, as evidenced by the US Consumer Price Index (CPI), with the performance of digital currencies, using the Bloomberg Galaxy Crypto Currency Index (BCGI). The result is largely inconclusive: although overall, the BCGI rose from the beginning to the end of the year, it was extremely volatile – in some cases dropping by more than 50 per cent – while inflation in the US has risen steadily to its highest level since 1990. .