Bitcoin is a Better Hedge than Gold Against Inflation

The modern global economy's intricacies stem from the deep interplay between commodities, inflation, Bitcoin, monetary policy, and global debt. Geopolitical situations, notably the Russia-Ukraine conflict have added a layer of complexity, especially when combined with central banks' strategies against inflationary challenges. The unique confluence of recent events culminated in a dynamic that has heretofore not existed where Gold as traditional inflation hedge and Bitcoin, an emerging asset class deemed as the “new” digital gold provided counterposing dynamics against the global economic backdrop which created high levels of inflation caused by both supply shocks to global commodities as well as rapid demand recovery post-Covid as well as disruptions in traditional supply chains.

The Russia-Ukraine conflict is a testament to how geopolitical events, like Russia's influential stance with a high concentration of global commodities production produced an unprecedented supply shock, affecting commodities from oil to agricultural products.

The response to high inflation caused by the Russia-Ukraine conflict resulted in Central Banks lead by the Federal Reserve to increase interest rates to combat inflation. This typical response while effecting in past inflationary cycles has proven to be less so this time around due to the unique circumstances which are responsible for the current, high, and persistent inflationary environment. While interest rate increases do lower demand by increasing borrowing costs, they haven’t been necessarily as effective to completely reduce inflation to the Fed’s 2% target rate. Aside from inflation being caused (in part) by high commodity prices, there are other causes such as capital that is flowing into areas such as energy transition infrastructure projects to meet global climate goals. This infrastructure is heavily commodity dependent and hence increases demand for certain commodities (metals such as copper, nickel, and steel are examples).

Commodities are priced in US Dollars including Gold. So why didn’t gold, which traditionally has served as a hedge against inflation, perform poorly during this inflationary cycle. It is largely because while demand for gold rose by countries seeking a safe-haven and an inflation hedge, the rapid rise in US interest rates caused a sharply strengthening dollar which put pressure on gold prices because of the inverse relationship between them and that rise overwhelmed any increase in price due to demand for the yellow metal. Contrasting gold, Bitcoin (which is also priced in US Dollars) however exhibited a unique resilience during this time-period, partly owing to its decentralized makeup, finite supply, and its growing reputation as a bulwark against economic turbulence and fiat money printing. This is an interesting development to watch going forward as perhaps gold (the “old” guard against inflation) passes its baton to Bitcoin as the “modern” and immutable hedge against inflation given its recent performance.

Grasping the nuanced interrelationship between commodities, inflation, gold, Bitcoin, monetary policy, and global debt is pivotal in today's global macro environment. With gold exhibiting anomalies in the wake of geopolitical events and not performing its traditional role as an inflation hedge vs Bitcoin's role becoming ever significant, investors must remain adaptive, recognizing that time-tested financial doctrines might evolve or display unanticipated behaviors in face of global challenges and the old play book may no longer work. Even though they say, “history doesn’t repeat but it rhymes”, perhaps this time it may not nor ever in the future.

So, what is the current view on the potential future price direction of Bitcoin? As most crypto currencies are driven largely by sentiment, tracking it is important for investors to get a sense of potential price direction. Given the large volume of opinions that get expressed in social media, gauging sentiment expressed on these platforms is ever more and more important, especially for crypto investors. Market Prophit is a platform that tracks sentiment on CryptoX for thousands of crypto currencies. Unlike other platforms, Market Prophit tracks 2 gauges of market sentiment: one called CROWD and one called Market Prophit Sentiment. CROWD sentiment is the average crowd-sourced sentiment from everyone expressing opinions about cryptocurrencies in social media while Market Prophit sentiment is a unique sentiment gauge derived from the best predictors of cryptocurrencies prices on CryptoX based on the accuracy of their crypto calls as measured by Market Prophit’s proprietary algorithms. The Market Prophit or “Smart Money” sentiment is an additional gauge and tool allowing investors to see two simultaneous views of the crypto market giving them an additional lens and indicator that allows them to have an independent view on what the overall crowd is saying. Below are two 2 sentiment gauges for Bitcoin currently:

Both the CROWD and the "Smart Money" sentiment agree and are bullish on Bitcoin right now signaling agreement between the two camps reflecting a double confirmation of the potential price action for Bitcoin.