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It has been almost a year now, and it seems that the epidemic situation in the United States has improved, as if the worst has passed. However, Fuqiu Technology believes that unfortunately it has just begun, that is, there is always a problem brewing-inflation. In the past two months of this writing, U.S. inflation has been at 4.2% and 5%, the highest indicators since the 2008 financial crisis.
As consumer demand begins to increase, the global supply chain is still in a state of disruption, and the high inflation rate not only worries the people in the United States itself, but also worries about the runaway inflation in the world. This raised concerns about the future value of the dollar, and investors began shifting wealth into gold or other inflation-protected securities, such as TIPS.
But as prices for cryptocurrencies continue to soar, investors are starting to wonder if bitcoin could be another inflation hedge.
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Inflation 101
The Federal Reserve defines inflation as a general increase in the overall price level of goods and services in the economy. Because the fundamentals of supply and demand drive the prices of goods, inflation typically occurs as a result of increased consumer demand and/or increased production costs (i.e., reduced supply).
While controlled inflation is good and helps drive economic growth, when inflation gets out of hand, panic ensues. When inflation becomes uncontrollable, purchasing power is decimated as everyday goods become more expensive and wages cannot keep up. Therefore, investors need a way to preserve their wealth and prevent it from shrinking.
So gold, a natural resource with limited supply, has intrinsic value and has historically been an alternative store of value.
Although CPI and PCE are both measures of inflation and are correlated with each other, the two indices are calculated using different metrics and weighting methods. In the rest of this paper, any reference to inflation or specific measures of inflation is in terms of the CPI.
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Gold as an inflation hedge
In order to answer the above questions, Maoqiu Technology uses monthly CPI and gold futures data since 1985 to calculate the correlation and bets of different investment periods.
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In Figure 1, the correlation between gold returns and CPI levels suggests that golds hedging properties may not be as strong as originally thought. In short-term and long-term investment horizons, the correlation is close to zero or slightly negative.
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Figure 2: Rolling Correlation Between Gold Returns and CPI Changes Over Different Investment Periods
However, Maoqiu Technology believes that because the relationship between assets changes over time according to the macroeconomic environment, analyzing rolling correlations is actually more insightful.
This is especially true during times of high inflation, such as the 2008 financial crisis, which supports the belief that gold is a hedge against inflation. However, the results show that gold is a strong long-term inflation hedge and a weaker short-term inflation hedge.
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In order to assess the extent to which golds return rate changes with changes in CPI, Figure 3 shows that the impact of CPI on gold is limited in the short-term investment range, but there is a considerable increase in the longer investment range. Especially during the 2008 financial crisis, the beta coefficient of long-term gold investment was as high as 15! This further supports the view that gold is a strong long-term inflation hedge.
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Bitcoin as an inflation hedge
However, quantitative analyzes supporting this claim have so far been very limited. In order to assess whether Bitcoin is indeed an inflation hedge, a similar issue for gold and the CPI will be analyzed. However, due to the limited history of Bitcoin, the timing compared to gold can only be recent adoption, so historical data from the end of 2013 will be used.
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In Figure 4, the correlation between Bitcoin and CPI in the short-term and long-term investment horizons has a moderate to strong positive relationship. From the above, this alone suggests that Bitcoin has the potential to be an inflation hedge.
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Similar to gold, the correlation between Bitcoin and CPI exhibits time-varying properties across different investment horizons. Figure 5 illustrates that Bitcoin has a weak/moderate relationship with CPI in the short term, but a medium/strong positive relationship in the long term, suggesting that Bitcoin can be better used as a medium/long-term inflation hedge.
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in conclusion
in conclusion
Although the analysis of whether Bitcoin can be an inflation tool is encouraging, Maoqiu Technology believes that it is still too early. Because although Bitcoin has been around for about 13 years, there is still not enough historical data to effectively analyze the relationship between cryptocurrencies and inflation.
