Bitcoin vs. Gold: Which Can Beat Inflation?

Both gold and bitcoin have hit record highs this year, but their sharp gains came long after inflation peaked in June 2022.

The sudden resurgence of inflation concerns is a bullish sign for recognized inflation hedges like gold and bitcoin, but worried investors shouldn’t ignore a simpler solution: stocks.

The Federal Reserve cut interest rates for the third time this year on Wednesday, but lowered its expectations for a 2025 rate cut, sparking fears on Wall Street and sending the Dow Jones Industrial Average down more than 1,000 points. U.S. economic growth remains strong and inflation remains high, so while the Fed cuts rates as expected, concerns about inflation are a key reason for the sharp rise in 10-year Treasury yields.

The prospect of continued inflation could provide a tailwind for gold and bitcoin, but the reality is more complicated than the asset’s promoters would have you believe.

Both Bitcoin and gold are considered inflation hedges because of their limited supply, which is not directly controlled by any government policymaker: Gold must be mined from the ground, Bitcoin is produced by "mining", and the total supply of mineable Bitcoin is fixed.

In October, legendary investor Paul Tudor Jones said in an interview with CNBC: "All roads lead to inflation... I'm long gold and I'm long Bitcoin." This video is still frequently shared by Bitcoin fans.

The argument for hedging against inflation is very easy to understand, but reality does not always match the theory. On Wednesday, Bitcoin and gold both fell as concerns about inflation pushed up long-term interest rates.

Before the Federal Reserve announced its interest rate decision on Wednesday, the price of Bitcoin was close to $105,000, and then fell sharply. Bitcoin fell to $98,000, according to CoinDesk, and gold closed down 0.3% on Wednesday and fell another 1.5% on Thursday, according to Dow Jones Market Data.

The long-term performance of the two assets has also been mixed. Both gold and Bitcoin have risen and hit record highs this year, but their sharp gains came long after inflation peaked in June 2022, with gold returning -0.4% in 2022 and Bitcoin plummeting 64%.

Why is this happening? Investors do buy gold to protect their portfolios from inflation, but the price of gold also reflects another countervailing force: interest rates. Because gold does not generate cash flow, it becomes less attractive relative to bonds when interest rates are high. To combat high inflation, the Federal Reserve has been steadily raising interest rates in 2022, so investors are more attracted to short-term Treasury bonds than gold despite high inflation.

The above dynamics may also be affecting the price of Bitcoin, but it is almost certain that the biggest driver of Bitcoin prices is hype. Bitcoin's short history makes it more difficult to assess long-term price dynamics, but prices have largely followed the Internet celebrity stock boom that emerged during the COVID-19 pandemic. The launch of Bitcoin ETFs this year and the rising odds that Trump, who supports cryptocurrencies, will win the presidential election have brought new "tailwinds" to Bitcoin.

Of course, even if Bitcoin and gold cannot serve as short-term or medium-term inflation hedges, they can still serve investors as long-term stores of value. The World Gold Council, an industry group, often says: "Gold has maintained its value for thousands of years."

However, if the investment time horizon is that long, investors should consider investing in stocks and keeping up with the rise in stock prices. Inflation may have a negative impact on stock market returns in the short term, as companies struggle to raise prices fast enough to cope with rising costs, and the S&P 500 index has not performed well in 2022, falling more than 18% for the year.

But over time, corporate profits will gradually adjust to inflation and stock prices will rebound, just as they have in the past two years. In the long run, stock investors can also benefit from profit growth that neither Bitcoin nor gold can provide.