Does Bitcoin Really Act As An Inflation Hedge?

Both in the US and Europe, the covid-19 pandemic has caused a price increase for assets like real estate and commodities given that there is a higher demand for houses with a garden and people are able to save more (as restaurant industry is closed and international travel is out of the question).

Analysts mostly agree that the $1.9 trillion stimulus package in the US and bond buying in Europe by the ECB could continue prices to follow this path.

However, the rising interest rates are a worrying sign. With all this, we wonder whether Paul Tudor Jones, the original hedge fund manager who argued that Bitcoin could work as a hedge against inflation, was right?

Short history

Economists foresee in the short term that prices of real estate and commodities will rise, and that even when the travel economy would reopen for the grand public, prices for travel will likewise go up. With all these price rises comes of course inflation and loss of your fiat money’s value. One of the original Wall Street arguments for protecting yourself against this by buying Bitcoin came from Paul Tudor Jones.

Who already in May of 2020 argued that his fund would spread this risk at least in part by investing in crypto directly. At that time, Bitcoin traded at $9,000 and was ready for the halving.

Limited supply

Anyone who took Tudor Jones’ advice at that time will have made a pretty penny. His logic was that unlike US dollars (which is still the preferred world reserve currency) or any other normal fiat currency, Bitcoin’s design works with a limited supply, and can therefore not be devalued by a government or a central bank distributing too much of it.

Cam Harvey, senior adviser to Research Affiliates and a professor of finance at Duke University, claims that this is not 100% sure though, given Bitcoin’s short historical span.

Professor Harvey stated:

What’s going to happen to Bitcoin? It’s really unclear.

The price is not just driven by the money-supply rule, it’s driven by other speculative forces. That’s why it’s multiple times more volatile than the stock market.

Hedge for inflation

On the other hand, there are still enough investors who agree with veteran trader Paul Tudor Jones. One of them is Michael Sonnenshein, chief executive officer at Grayscale Investments, who stated that the current Bitcoin price rise:

Is certainly an element that has driven investment by institutions, particularly in the wake of the ways in which policymakers have worked to jump-start the economy

Certainly we have no shortage of global macro investors for whom adding Bitcoin has acted for them as a hedge for inflation.

Even Ark Investment Management founder Cathie Wood, one of the most successful wealth managers of 2020 and a known Bitcoin supporter, admitted in a recent webinar that she’s just as concerned about the forces of deflation—or falling prices— as she is about inflation.

So what will happen to Bitcoin when interest rates go up further and price pressure increases? It’s anybody’s guess at this point it seems.