Will Bitcoin Protect Against Inflation? Depends on Where You Live

Its limited supply of 21 million coins and decentralized nature evoke comparisons to ”digital gold,” but does this theory really work in practice?”

After the COVID-19 pandemic, inflation went from a localized emerging market problem to a global phenomenon. Investors around the world began urgently reassessing capital preservation strategies, and bitcoin has been at the center of these discussions.

When countries and companies bet on bitcoin

Several companies and even entire nations have decided to add bitcoin to their reserves to protect against the risks of fiat currencies depreciating. The most famous example is Salvador, which in 2021 became the first country to accept bitcoin as legal tender. Companies like Strategy in the United States and Metaplanet in Japan have followed suit, and the United States is now in the process of creating its own strategic bitcoin reserve.

So far, this investment strategy has paid off - bitcoin has outperformed the S&P 500 and gold futures since the early 2020s, when U.S. inflation began to skyrocket. Recently, however, this impressive momentum has begun to moderate. While bitcoin has remained a strong performer over the past 12 months and its gains have outpaced consumer inflation, we must not forget that past performance is no guarantee of future results.

Conflicting data from developed economies

Unlike traditional inflation protection instruments such as gold, bitcoin is a relatively new asset. Its role as a protective instrument remains uncertain, especially given that it has only become widely accepted in recent years.

Despite high inflation in recent years, the bitcoin price has exhibited wild swings, often correlating more with risky assets like tech stocks than with traditional protective instruments.

Research shows that bitcoin's ability to protect against inflation has weakened over time, especially as institutional acceptance has grown. In 2022, when U.S. inflation hit a 40-year high, bitcoin lost more than 60% of its value, while gold, the traditional inflation-protection tool, remained relatively stable.

For bitcoin to be a true inflation protection, its returns must consistently outpace inflation year after year. However, due to its parabolic nature, bitcoin's returns are highly uneven over time - periods of sharp increases alternate with deep drops, which is not typical of a classic inflation-protection tool. Bitcoin's movement now has more to do with how investors allocate their assets in the market than with inflation protection - the price depends on the movement of large amounts of capital between different asset classes and changes in interest rates set by central banks.

Argentina and Turkey: when cryptocurrency becomes a lifesaver

In economies suffering from uncontrolled inflation and strict currency controls, bitcoin has proven its value as a wealth preservation tool. Argentina and Turkey, two countries with persistent inflation over the past decades, perfectly illustrate this dynamic.

Research shows that 87% of Argentines believe that cryptocurrencies and blockchain technology can increase their financial independence, and nearly three-quarters see cryptocurrencies as a solution to problems such as inflation and high transaction costs.

With a population of 45 million, Argentina has become a center of cryptocurrency adoption, with up to five million Argentines using digital assets every day.

Economic freedom is the cornerstone of prosperity, and for many Argentines, cryptocurrency is not just an investment, but a necessity to regain control of their financial future.

People in Argentina don't trust the peso and are always looking for ways to store valuables outside of the local currency. Bitcoin and Stablecoins allow them to bypass currency controls and protect their savings from devaluation.

In addition to individual investors, businesses in Argentina also use bitcoin and stablecoins to protect revenue and conduct international transactions. Some employees even choose to receive part of their paychecks in cryptocurrency to protect their income from inflation.

Turkey: citizens vs. government

Relative to the size of its economy, Turkey has become a hotspot for stablecoin transactions. In the year leading up to March 2024, stemcoin purchases alone accounted for 4.3% of GDP. This boom in digital currencies, fueled by years of double-digit inflation that peaked at 85% in 2022 and the lira's collapse of more than 80% against the dollar over the past five years, has gained momentum during the pandemic.

While Turkey allows its citizens to buy, store and trade cryptocurrencies, their use for payments has been banned since 2021, when the Turkish Central Bank banned ”any direct or indirect use of cryptoassets in payment services and issuance of electronic money.” Nevertheless, the adoption of cryptocurrencies in Turkey is evident, with more and more Turkish banks offering crypto services and stores and ATMs providing cryptocurrency exchange options.

High inflation rates have contributed to the depreciation of the Turkish lira, which lost nearly 60% of its purchasing power when inflation jumped to 85.5% between 2021 and 2023. This has led many Turkish citizens to turn to bitcoin as a means of preserving value and a medium of exchange.

Bitcoin: universal answer or context-dependent?

While bitcoin's limited supply should theoretically be good for its long-term growth, potentially outpacing consumer inflation, its high volatility and recurring correlation with technology indices such as the Nasdaq have recently suggested that its effectiveness as a net hedge against inflation remains mixed.

However, in high-inflation countries such as Argentina and Turkey, where local currencies have depreciated, digital gold has undeniably become a crucial means of fleeing local currencies, preserving purchasing power in a way that traditional fiat currency cannot.

Bitcoin is still a young asset, and its effectiveness as a protective tool requires further study. But one thing remains clear - so far it has significantly outpaced consumer inflation in many parts of the world.