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.”
However, as the year unfolded, this turned out to be anything but true. So how did Bitcoin perform in 2022, and was it any match against gold regarding a hedge against inflation?
Consumer Price Index
Inflation is widely measured by an economic indicator called Consumer Price Index (CPI). CPI lets us know how the average price of a basket of goods has changed over time. The year-over-year growth in CPI was around 7% at the start of 2022, well above the Federal Reserve’s long-term goal of 2%. By June, the 12-month CPI was up to 9.1%. This was the largest year-over-year increase since November 1981—before cryptocurrency was even a concept. While CPI readings decreased each month after that, they ended the year around 6.5%.
Bitcoin vs. Gold
Bitcoin is a digital currency designed to act as money and a form of payment. Bitcoin differs from the U.S. dollar because only a finite 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 great 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 like jewelry. However, its track record against inflation has been inconsistent.
Performance
Not many asset classes were immune to poor performance in 2022. Many investors were trying to de-risk their portfolios as the Federal Reserve aggressively raised interest rates to tame inflation. The S&P 500 had its worst year since the Great Financial Crisis, dropping -18.1%. Tech stocks were down even more, about -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 an abysmal -64.8%, while gold ended the year relatively flat, down about -0.7%, but failing to keep up with an inflation rate of 6.5%.
These numbers would suggest that gold is indeed better when it comes to inflation hedging, but don’t jump to conclusions based on one year. Gold’s track record is not perfect during periods of inflation. For example, gold returned an average 35% annualized return from 1973 to 1979 when the average inflation rate was around 8.8%. These are incredible returns! However, from 1980 to 1984, gold fell an average -10% each year when inflation averaged 6.5%.
And the Winner is…
Based on performance in 2022, gold is the obvious 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. We also can’t ignore other asset classes when considering the decisive winner. For example, in 2022, Series I Bonds were offering returns of around 9.62%.
In addition, the best long-term hedge against inflation is hiding in plain sight: the stock market. While it can be volatile in the short run (see 2022), its long-term 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. It is rather 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 markets. Speaking with a financial advisor to ensure your portfolio is built to withstand these volatile times is important.
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All opinions expressed in this article are for general informational purposes and constitute the judgment of the author(s) as of the date of the report. These opinions are subject to change without notice and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material has been gathered from sources believed to be reliable, however Bedel Financial Consulting, Inc. cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. PAST PERFORMANCE IS NOT A GUARANTEE OF FUTURE RESULTS. Investment decisions should always be made based on the client's specific financial needs, goals and objectives, time horizon and risk tolerance. Current and future portfolio holdings are subject to risk. Risks may include interest-rate risk, market risk, inflation risk, deflation risk, currency risk, reinvestment risk, business risk, liquidity risk, financial risk, and cybersecurity risk. These risks are more fully described in Bedel Financial Consulting, Inc.'s Firm Brochure (Part 2A of Form ADV), which is available upon request. Bedel Financial Consulting, Inc. does not guarantee the results of any investments. Investment, insurance and annuity products are not FDIC insured, are not bank guaranteed, and may lose value. Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products.
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