Is bitcoin an inflation hedge?

35 Pages Posted: 12 Apr 2024

See all articles by Harold Rodriguez

Harold Rodriguez

Getulio Vargas Foundation (FGV), Sao Paulo School of Economics, Students

Jefferson Colombo

Sao Paulo School of Economics (FGV EESP)

Date Written: March 06, 2024

Abstract

Spot bitcoin ETFs have been recently approved in the U.S., increasing retail and institutional investors’ attention to the crypto space. Still, empirical evidence on whether Bitcoin is an asset that protects investors against inflation is still inconclusive. To contribute to this debate, we analyze the effect of inflation shocks on bitcoin returns through the estimation and inference of Vector Autoregressive Models (VARs). Unlike previous research on the topic, we identify inflation shocks as surprises in the US’s CPI and Core PCE announcements: the difference between the announced inflation and the analysts’ consensus. The results, based on monthly data between August 2010 and January 2023, indicate that bitcoin returns increase significantly after a positive inflationary shock, corroborating empirical evidence that Bitcoin can act as an inflation hedge. However, we observe that bitcoin’s inflationary hedging property is sensitive to the price index – it only holds for CPI shocks – and to the period of analysis — the hedging property stems primarily from sample periods before the increasing institutional adoption of BTC (“early days”). Thus, the inflation-hedging property of Bitcoin is context-specific and is likely to be diminishing as adoption increases. This research contributes to the still under-explored strand of literature that analyzes the hedging and safe-haven properties of Bitcoin and benefits asset managers, investors, and monetary authorities.

Keywords: Bitcoin, Hedge against inflation, Unexpected inflation, surprises in CPI, surprises in PCE.

JEL Classification: E44, E31, G11.

Suggested Citation

Rodriguez, Harold and Colombo, Jefferson, Is bitcoin an inflation hedge? (March 06, 2024). Available at SSRN: https://ssrn.com/abstract=4763347 or http://dx.doi.org/10.2139/ssrn.4763347

Harold Rodriguez

Getulio Vargas Foundation (FGV), Sao Paulo School of Economics, Students ( email )

Rua Itapeva 474 s.1202
São Paulo
Brazil

Jefferson Colombo (Contact Author)

Sao Paulo School of Economics (FGV EESP) ( email )

Rua Itapeva 474 s.1202
São Paulo, São Paulo 01332-000
Brazil

HOME PAGE: http://https://eesp.fgv.br/integrante/jefferson-colombo

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