Is Bitcoin An Inflation Hedge? A Critique Of The Bitcoin As Money Narrative

This is an opinion editorial by Taimur Ahmad, a graduate student at Stanford University, focusing on energy, environmental policy and international politics.

Author’s note: This is the first part of a three-part publication.

Part 1 introduces the Bitcoin standard and assesses Bitcoin as an inflation hedge, going deeper into the concept of inflation.

Part 2 focuses on the current fiat system, how money is created, what the money supply is and begins to comment on bitcoin as money.

Part 3 delves into the history of money, its relationship to state and society, inflation in the Global South, the progressive case for/against Bitcoin as money and alternative use-cases.

here), is integral to Bitcoin standing apart from other crypto assets.

evidence to show that real wages have been stagnant even when productivity has been rising, inequality has been surging higher, the economy has been increasingly financialized which has benefited the wealthy and asset owners, financial entities have been involved in corrupt and criminal activities and most of the Global South has suffered from economic turmoil — high inflation, defaults, etc., — under an exploitative global financial system. The neoliberal system has been unequal, oppressive and duplicitous.

fallen victim to state capture by the elite, leaving little space for political change and accountability. Therefore, while there are many wealthy proponents of Bitcoin, a significant proportion of those arguing for this new standard can be seen as those who have been “left behind” and/or recognize the grotesqueness of the current system and are simply looking for a way out.

It is important to understand this as an explanation to why there is an increasing number of “progressives” — loosely defined as people arguing for some form of equality and justice — who are becoming pro-Bitcoin standard. For decades, the question of “what is money?” or the fairness of our financial system has been relatively absent from mainstream discourse, buried under Econ-101 fallacies, and confined to mostly ideological echo chambers. Now, as the pendulum of history turns back towards populism, these questions have become mainstream again, but there is a dearth of those in the expert class that can sufficiently be sympathetic towards, and coherently respond to, people’s concerns.

Therefore, it is critical to understand where this Bitcoin standard narrative emerges from and to not outrightly dismiss it, even if one disagrees with it; rather, we must recognize that many of us skeptical of the current system share a lot more than we disagree upon, at least at a first principles level, and that engaging in debate beyond the surface level is the only way to raise collective conscience to a stage that makes change possible.

risk assets performed remarkably well, and yet they are not deemed as inflation hedges in any way. And also, developed economies were operating under a secular low inflation regime so this claim was never really tested.

More importantly though, as prices surged higher over the past year and Bitcoin’s price plummeted, the argument shifted to “Bitcoin is a hedge against monetary inflation,” meaning that it doesn’t hedge against a rise in the price of goods and services per se, but against the “devaluation of currency through money printing.” The chart below is used as evidence for this claim.

episode of the What Bitcoin Did podcast remarked that Bitcoin was a hedge against inflation caused through excessive monetary expansion and not when that inflation was supply-side, which, as he rightly pointed out, is the current situation. In a recent piece on the same topic, he responds to the critique that other risk-on assets also go up during periods of monetary expansion by writing that Bitcoin goes up more than other assets and that only Bitcoin should be considered as a hedge because it is “just money,” while other assets are not.

strong correlation with tech stocks in particular, and the equity market more broadly. The fact is that the ultimate driving factor behind its price action is the change in global liquidity, particularly U.S. liquidity, because that is what decides how far across the risk curve investors are willing to push out. In times of crisis, such as now, when safe haven assets like the USD are having a strong run, Bitcoin is not playing a similar role.

Therefore, there doesn’t seem to be any analytical reason that Bitcoin trades differently to a risk-on asset riding liquidity waves, and that it should be treated, simply from an investment point of view, as anything different. Granted, this relationship may change in the future but that’s for the market to decide.

structural problem in and of itself).

Therefore, empirically there is no significant evidence that an increase in M2 necessarily leads to an increase in CPI (it is worth reminding here that I am focusing on developed economies primarily and will address the topic of inflation in the Global South later). If there was, Japan would not be stuck in a low inflationary economy, well below its inflation target, despite the expansion of the Bank of Japan balance sheet over the past few decades. The current inflationary bout is because of energy prices and supply chain disruptions, which is why countries in Europe — with their high dependence on Russian gas and poorly thought-out energy policy — for example, are facing higher inflation than other developed countries.

podcast. Peter remarked how this made sense but felt so counter to the prevailing narrative.

Even if we take the monetarist theory as correct, let’s get into some specifics. The key equation is MV = PQ.

M: money supply.
V: velocity of money.
P: prices.
Q: quantity of goods and services.

What these M2 based charts and analyses miss is how the velocity of money changes. Take 2020 for example. The M2 money supply surged higher because of the fiscal and monetary response of the government, leading many to predict hyperinflation around the corner. But while M2 increased in 2020 by ~25%, the velocity of money decreased by ~18%. So even taking the monetarist theory at face value, the dynamics are more complicated than simply drawing a causal link between money supply increase and inflation.

As for those who will bring up the Webster dictionary definition of inflation from the early 20th century as an increase in money supply, I’d say that change in money supply under the gold standard meant something completely different to what it is today (addressed next). Also, Friedman’s claim, which is a core part of the Bitcoiner argument, is essentially a truism. Yes, by definition higher prices, when not due to physical constraints, is when more money is chasing the same goods. But that does not in and of itself translate to the fact that increase in the money supply necessitates an increase in prices because that additional liquidity can unlock spare capacity, lead to productivity gains, expand the use of deflationary technologies, etc. This is a central argument for (trigger warning here) MMT, which argues that targeted use of fiscal spending can expand capacity, particularly through targeting the “reserve army of the unemployed,” as Marx called it, and employing them rather than treating them as sacrificial lambs at the neoclassical altar.

To bring this point to a close then, it’s hard to understand how inflation is, for all intents and purposes, anything different to an increase in CPI. And if the monetary expansion leads to inflation mantra does not hold, then what is the merit behind Bitcoin being a “hedge” against that expansion? What exactly is the hedge against?

I will admit there are a plethora of issues with how CPI is measured, but it is undeniable that changes in prices happen because of a myriad of reasons across the demand-side and supply-side spectrum. This fact has also been noted by Powell, Yellen, Greenspan, and other central bankers (eventually), while various heterodox economists have been arguing this for decades. Inflation is a remarkably complicated concept that cannot be simply reduced to monetary expansion. Therefore, this calls into question whether Bitcoin is a hedge against inflation if it is not protecting value when CPI is surging, and that this concept of hedging against monetary expansion is just chicanery.

In Part 2, I explain the current fiat system, how money gets created (it’s not all the government’s doing), and what Bitcoin as money could lack.

This is a guest post by Taimur Ahmad. Opinions expressed are entirely their own and do not necessarily reflect those of BTC, Inc. or Bitcoin Magazine.