Bitcoin as an Inflation Hedge: Is it as Simple as This?

Bitcoin’s uses cases are many (self-sovereignty, payments/money movement, social signaling, etc.), but two perhaps float to the top of the narrative pile when you talk to enough people about it: bitcoin as an inflation hedge and bitcoin as a speculative asset.

While both are reasons to invest, the reasoning is very different.

Bitcoin as an inflation hedge: With its fixed supply, declining issuance rate and the relative stability in its protocol characteristics, bitcoin’s inflation rate is both known and decelerating. By contrast, the U.S. dollar money supply continues to grow, making inflation both unknown and accelerating. This juxtaposition is what gives bitcoin its inflation hedge narrative.

Bitcoin as a speculative asset: Given the use cases noted above, bitcoin could still potentially be at the early adopter stage of each (including as an inflation hedge). At least, that’s what those who invest based on the idea that bitcoin is a speculative asset would believe. Get in before the rest of the crowd: a digital land grab. The scarcity of bitcoin, it’s position analogous to digital monetary real estate, is what drives bitcoin’s speculative asset narrative.

So why did Bitcoin fail as an inflation hedge through the 2020-2022 cycle? I’d argue it’s simply because the speculative asset investment thesis dominates the inflation hedge thesis in the market today. There are more people investing in bitcoin today who are speculating on its growing adoption than there are people who are investing specifically to hedge inflation.

Over time, however, this will change:

Eventually early adopters give way to the crowds that follow. As more people join the party, the speculative asset thesis loses its foundation as there are fewer and fewer people left to be the marginal adopter. As speculative returns compress and speculators make up a smaller portion of those holding bitcoin, those that remain are there for the other primary use case: hedging inflation.

Bitcoin will gain the characteristics of an inflation-hedging asset as it matures and as the speculation fades.  

Is it as simple as that?

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