Recently, ratings agency S&P Global highlighted the appeal of cryptocurrencies as potential assets that could protect investors from inflation. However, the agency also stressed the lack of data to support this popular narrative. As per S&P Global, crypto assets could theoretically act as a hedge against inflation, especially in emerging markets where high inflation is an issue. Nonetheless, they also pointed out that the track record for crypto is too short to make such a claim.
Many crypto enthusiasts consider bitcoin, the largest digital asset by market value, as a store of value like gold, thanks to its programmed code that halves bitcoin’s pace of supply expansion every four years. This mining reward halving contrasts the ever-increasing fiat money supply worldwide, which many believe to be inflationary. The broader crypto market, including decentralized finance (DeFi), is often seen as an alternative to centralized fiat banking systems.
However, S&P Global’s findings contradict this narrative. Their data showed that the historical correlation between the daily returns of S&P BDMI, their crypto index, and the U.S. two-year and 10-year breakeven inflation expectations is just 0.10. A stronger correlation, at least 0.75, might be required to support the inflation hedge claim. Moreover, Bitcoin’s market value plummeted by over 70% last year, even as the U.S. inflation rate, measured by the consumer price index, averaged 8%.
The S&P Global report also highlighted that gold’s daily returns have consistently tracked inflation expectations since 2013. This is supported by evidence of Granger Causality between the 10-year Breakeven Inflation Expectation index and the S&P GSCI Gold index at a 95% confidence level. However, this same test fails for Bitcoin.
Interestingly, cryptocurrencies do show sensitivity to the cost of borrowing in the economy, tending to move in the opposite direction of the U.S. two-year Treasury yield. Since May 2020, the beginning of the COVID-19 pandemic, this inverse relationship has been observed 75% of the time. This could suggest that despite the lack of conclusive evidence for the crypto-inflation hedge narrative, there remains a connection between cryptocurrencies and other economic factors.
In conclusion, while cryptocurrencies may hold theoretical appeal as inflation hedges, data supporting this claim remains scarce. Investors should approach this topic with skepticism and consider other factors, such as crypto’s sensitivity to interest rates, when making financial decisions.
Source: Coindesk
