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Gold vs. Crypto – Which is the best inflation hedge?

Rising inflation all around the world has become one of the top concerns among policymakers, but also for institutions and the average person. Rising prices reflect a diminishing purchasing power of fiat currencies, which should prompt you to look for proper inflation hedges.

In doing so, you can preserve purchasing power, but all of this comes with several risks. The debate continues as to which asset is the best inflation hedge and in this article, the focus will turn to gold and cryptocurrencies.

gold vs. crypto as an inflation hedge [1]
Source: https://pixabay.com/photos/cryptocurrency-concept-blockchain-3423262/

Comparison of both markets

Since the pandemic has had a major impact on the global economy, as well as on asset prices, it would be appropriate to first see how gold and the crypto market performed during the past two years. At the March 2020 bottom, the price of gold in USD was around $1,450, later managing to climb above $2,000 for the first time [2] in its history.

It peaked in August 2020, on the back of rising Treasury yields and a strong risk appetite, which led market participants towards other asset classes.

When looking at cryptocurrencies such as Bitcoin, volatility has been much more significant. The price of BTC bottomed at $4,000 and since then rose above $65,000 by November 2021. Some other altcoins have posted even larger returns, but traders should consider the risks involved were (and still are) larger.

Now that the financial industry has been democratized, trading via mobile apps [3] is possible. This puts any individual in a position to get involved in any asset, without requiring a lot of capital or advanced hardware.

Risk appetite – an important factor?

Considering both gold and cryptocurrencies have risen in USD terms, you could conclude these are inflation hedges. An asset return, however, does not mean anyone can take advantage and generate income in the future. The risk profile is important and some traders might perform well when trading gold, while others will feel comfortable taking greater risks with cryptocurrencies.

A divergence of opinions is the case here because each individual is limited by their own beliefs, while in finance there are many different ways to hedge against inflation, each with both pros and cons.

A change of generation among market participants

Conflicting beliefs can also be attributed to the fact that traditional investors and traders, which have been in the industry for a longer period of time, show an appeal for gold, an asset that until 1971 has been at the core of the global monetary system.

On the other hand, as youngsters get involved in finance, they are attracted by digitalization [4], given they grew up with advanced technology all around them. Which camp will ultimately prevail? It is yet to be seen, but you should keep in mind that emerging industries, such as crypto, take time to mature, and are bound for elevated volatility until that happens.

All in all, diversification among different hard assets remains one of the most trusted ways to protect yourself against inflation risks. As long as interest rates are low and fiscal spending increases each time there’s an economic downturn, hard assets can outperform cash.

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