Bitcoin vs. gold – Inside INdiana Business

Last year, a spike in inflation caught the attention of investors (and the Fed). As a result, many Bitcoin enthusiasts were excited about the opportunity to prove the coin’s value against inflation as “digital gold.”

But as the year progressed, this proved to be anything but true. So how did Bitcoin perform in 2022 and was there any fight against gold for a hedge against inflation?

Consumer price index

Inflation is widely measured by an economic indicator called the consumer price index (CPI). The CPI tells us how the average price of a basket of goods has changed over time. Year-over-year growth in the CPI was around 7% at the start of 2022, well above the Federal Reserve’s long-term target of 2%. In June, the 12-month CPI was up to 9.1%. This was the biggest year-over-year increase since November 1981 – before cryptocurrency was even a concept. While CPI readings declined each month after that, they ended the year around 6.5%.

Bitcoin against gold

Bitcoin is a digital currency designed to act as money and a form of payment. Bitcoin differs from the US dollar because only a limited number of digital coins are available. Only 21 million bitcoins were created. Conversely, central banks can increase the money supply by printing more currency. Proponents argued that the scarcity of bitcoins made it a large store of value and thus would provide a hedge against inflation.

Gold has long been hailed as the ultimate hedge against inflation. This is because it has a relatively limited supply and is used in tangible products such as jewellery. However, its track record against inflation has been inconsistent.

Performance

Not many asset classes were immune to poor performance in 2022. Many investors tried to de-risk their portfolios as the Federal Reserve aggressively raised interest rates to curb inflation. The S&P 500 had its worst year since the Great Financial Crisis, falling -18.1%. Technology stocks fell even more, around -32.5%. Even the broad bond market offered no protection as it fell -13%. As for the two purported inflation hedges, bitcoin ended the year down a bottomless -64.8%, while gold ended the year relatively flat, down around -0.7% but unable to keep up with an inflation rate of 6.5%.

These numbers suggest that gold is actually better as an inflation hedge, but don’t jump to conclusions based on one year. Gold’s track record is not perfect during periods of inflation. For example, gold gave an average 35% annual return from 1973 to 1979 when the average inflation rate was around 8.8%. These are incredible returns! But from 1980 to 1984, gold fell an average of -10% each year when inflation averaged 6.5%.

And the winner is…

Based on performance in 2022, gold is the clear winner between the two. However, it would be ignorant of us to claim the ultimate long-term winner based on just one year of data. Nor can we ignore other asset classes when assessing the decisive winner. For example, in 2022 Series I bonds yielded around 9.62%.

In addition, the best long-term hedge against inflation is hiding in plain sight: the stock market. While it may be volatile in the short term (see 2022), its long-term track record is outstanding. For example, from 1926 to 2022, the S&P 500 had an annualized return of about 10.04% if you reinvest dividends. This is more than enough to hedge against all but the most punishing periods of inflation.

Summary

It is important to note that this article is not an argument for investing in gold over bitcoin during inflationary environments. Rather, it is a performance review of bitcoin’s first inflationary period.

Bitcoin is a very new investment, first introduced in 2009, so it may need more time to adapt. Gold has been around for thousands of years. Periods of high inflation will typically create volatility in the markets. It’s important to speak with a financial advisor to ensure your portfolio is built to withstand these volatile times.

Austin Stagman, CIMA, is a portfolio manager at Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email Austin at [email protected]