Inflation has shifted from being a pressing issue primarily for developing nations to a global concern, especially following the COVID-19 pandemic. Countries that once enjoyed stable economies with low inflation rates have begun facing significant price increases, leading investors to reconsider their strategies for wealth preservation.
Traditionally regarded as safe-haven assets, gold and real estate are now facing competition from Bitcoin. Proponents of Bitcoin claim that its limited supply and decentralized structure render it an effective safeguard against inflation. Yet, the validity of this assertion is contingent on various factors, particularly geographical location.
Supporters of Bitcoin highlight its maximum supply cap of 21 million coins as a crucial factor in countering inflationary policies. Unlike fiat currencies, which can be printed indefinitely by central banks, Bitcoin’s issuance is controlled by a predetermined algorithm, thus preventing artificial inflation. This limitation is often cited as a reason Bitcoin is likened to “digital gold,” suggesting it offers a more dependable store of value than conventional currencies issued by governments.
A number of businesses and even entire nations have recognized the potential of Bitcoin and have incorporated it into their financial reserves to mitigate the risks associated with fiat currencies and inflation. A prominent example is El Salvador, which made headlines in 2021 by becoming the first country to officially adopt Bitcoin as legal tender. Since then, the Salvadoran government has been gradually increasing its Bitcoin holdings as part of its economic initiatives. Other companies, such as Strategy in the US and Metaplanet in Japan, have also invested in Bitcoin, while the US government is in the process of creating its own Strategic Bitcoin Reserve.
Thus far, the strategy of investing in Bitcoin has yielded positive results, as BTC has outperformed both the S&P 500 and gold futures since the onset of inflation in the United States in early 2020. However, recent trends indicate that this strong performance may be stabilizing. Over the past year, Bitcoin has continued to show impressive results, and while its gains have surpassed consumer inflation rates, experts warn that historical performance does not guarantee future outcomes. Some studies indicate that the relationship between cryptocurrency returns and fluctuations in inflation expectations lacks consistency over time.
Bitcoin’s effectiveness as a hedge against inflation remains an open question. Unlike traditional inflation protectors like gold, Bitcoin is still a relatively new asset, and its function as a hedge is still being defined, particularly as it gains broader acceptance in the financial landscape. Despite experiencing high inflation recently, Bitcoin’s price has exhibited significant volatility, often moving in tandem with riskier assets like technology stocks rather than aligning with conventional inflation hedges such as gold. A recent study in the Journal of Economics and Business suggests that Bitcoin’s capacity to act as an inflation hedge has diminished over time, especially with increased institutional investment. In 2022, when US inflation reached a 40-year peak, Bitcoin’s value dropped by over 60%, while gold maintained a more stable status.
This leads some analysts to propose that Bitcoin’s price is more influenced by market sentiment and liquidity variables than macroeconomic factors like inflation. When investor appetite is robust, Bitcoin tends to rise; conversely, during market downturns, it often declines alongside stock prices. Harold Rodriguez and Jefferson Colombo, authors of a study published in the Journal of Economics and Business, found that “Bitcoin returns increase significantly after a positive inflationary shock,” reinforcing the idea that Bitcoin can serve as an inflation hedge. However, they acknowledged that this property was more pronounced in the early stages of Bitcoin’s adoption and is likely to weaken as it becomes more integrated into mainstream financial markets.
Robert Walden, head of trading at Abra, commented, “So far, it has acted as an inflation hedge—but it’s not a black-and-white case. It’s more of a cyclical phenomenon. For Bitcoin to be a true inflation hedge, it would need to consistently outpace inflation year after year with its returns. However, due to its parabolic nature, its performance tends to be highly asymmetric over time.” According to Walden, Bitcoin’s current movements are influenced more by market positioning than by its role as an inflation hedge, focusing on capital flows and interest rates.
Argentina and Turkey Seek Financial Refuge in Crypto
In nations facing rampant inflation and stringent capital controls, Bitcoin has emerged as a crucial asset for wealth preservation. Argentina and Turkey serve as notable examples of this trend, both struggling with persistent inflation over the years. Argentina, which has a history of financial turbulence and soaring inflation, has seen recent improvements; however, its citizens have often turned to cryptocurrency to navigate financial restrictions and safeguard their wealth from depreciation.
A recent survey by Coinbase revealed that 87% of Argentinians believe that cryptocurrency and blockchain technology can enhance their financial autonomy, with nearly 75% perceiving crypto as a potential remedy for inflation and high transaction costs. With a population of 45 million, Argentina has become a hotspot for crypto adoption, with reports indicating that as many as five million Argentinians engage with digital assets daily. “Economic freedom is a cornerstone of prosperity, and we are proud to bring secure, transparent, and reliable crypto services to Argentina,” said Fabio Plein, Coinbase’s Director for the Americas. He added, “For many Argentinians, crypto isn’t just an investment; it’s a necessity for regaining control over their financial futures.”
“People in Argentina don’t trust the peso. They are always looking for ways to store value outside of the local currency,” commented Julián Colombo, a senior director at Bitso, a leading cryptocurrency exchange in Latin America. “Bitcoin and stablecoins allow them to bypass capital controls and protect their savings from devaluation.” Beyond individual investors, businesses in Argentina are increasingly using Bitcoin and stablecoins to secure revenue streams and facilitate international transactions. Some workers even opt to receive portions of their salaries in cryptocurrency to shield their earnings from inflation.
Economist and crypto analyst Natalia Motyl explained, “Currency restrictions and capital controls imposed in recent years have made access to US dollars increasingly difficult amid high inflation and a crisis of confidence in the Argentine peso. In this environment, cryptocurrencies have emerged as a viable alternative for preserving the value of money, allowing individuals and businesses to bypass the limitations of the traditional financial system.” While the debate continues regarding Bitcoin’s effectiveness as an inflation hedge, stablecoins have proven to be a more pragmatic solution in high-inflation economies, especially those pegged to the US dollar.
Turkey has also seen significant engagement with stablecoins relative to its economic size, with purchases accounting for 4.3% of GDP in the year leading up to March 2024. This surge in digital currency transactions has been driven by persistent double-digit inflation, which peaked at 85% in 2022, and a staggering decline of over 80% in the lira’s value against the dollar over the past five years, a trend that accelerated during the pandemic. Although Turkey permits its citizens to buy, hold, and trade cryptocurrencies, the Central Bank of the Republic of Turkey has banned their use in payment transactions since 2021, limiting “any direct or indirect usage of crypto assets in payment services and electronic money issuance.” Despite this, the adoption of cryptocurrencies in Turkey continues to grow, with more Turkish banks offering crypto services and numerous shops and ATMs facilitating crypto exchanges.
The soaring inflation rates have severely diminished the purchasing power of the Turkish lira, which lost nearly 60% of its value from 2021 to 2023 due to inflation reaching 85.5%. This economic climate has prompted many Turkish citizens to seek refuge in Bitcoin as a store of value and transactional medium. While some maintain that Bitcoin’s limited supply may allow it to appreciate over the long term, its recent volatility and correlation with risk-sensitive indexes like the Nasdaq indicate that its role as a straightforward inflation hedge is still debatable. Nonetheless, in countries plagued by inflation such as Argentina and Turkey, where local currencies have drastically depreciated, Bitcoin has undeniably provided a vital escape route, helping to preserve purchasing power where traditional fiat systems have failed.
Although Bitcoin remains a relatively new asset class and its effectiveness as a hedge requires further examination, it has undeniably outperformed consumer inflation thus far. For Bitcoin advocates, this alone serves as cause for celebration.
This article is intended for informational purposes only and should not be construed as legal or investment advice. The opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph.
