Is bitcoin an inflation hedge? As CPI surges to over 31-year high, crypto trades near record high

The monthly rise has shifted the pace of inflation over the past year to 6.2% in October from 5.4% in the prior month, exceeding the Federal Reserve’s 2% annual target and representing the highest annualized rate since November 1990.

On top of that economic report, China on Tuesday reported that its own factory gate prices surged 13.5% in October, marking the highest level since 1996. Consumer prices in the country rose 1.5% to a 13-month high, driven mainly by a rise in volatile food and energy prices.

So, what does this mean for digital assets like bitcoin BTCUSD, +1.05% and Ether ETHUSD, +4.16% on the Ethereum blockchain?

Some analysts have been making the case that high inflation, resulting from increased demand and supply-chain bottlenecks, formed in the recovery phase of the COVID-19 pandemic, have supported higher crypto values, particularly centered on assets such as bitcoin, which is viewed by some proponents as digital gold.

Fawad Razaqzada, market analyst at ThinkMarkets, in a Wednesday note said that recent trading in virtual currencies confirms his “suspicion that the crypto rally has been fueled in part by the rising levels of inflation.”

A number of key officials at the Federal Reserve have persistently referred to the pandemic-fueled rise in inflation as transitory but the consistent readings have thrown some doubt on that supposition among investors.

Noelle Acheson, head of market insights at Genesis, said that rising inflation is “bullish for bitcoin” and gold, with the latter asset being traditionally perceived as an inflation hedge.

Acheson said that inflation “has triggered rallies in both bitcoin and gold, as the ‘transitory’ nature of the inflation we’re seeing gets increasingly called into question.

“The correlation between gold and BTC has been negative since the summer, but started heading up at the beginning of the month as macro investors accelerated their adjustment of portfolios for a more inflationary environment,” wrote the Genesis analyst, in a Wednesday emailed note.

Rising inflation also has helped to catapult gold GC00, +0.86% well above the significant $1,800 an ounce level because assets that don’t offer a yield benefit from a low-yield regime, with the Fed suggesting that it will be patient in normalizing monetary policy, even as the central bank has announced its intention to reduce monthly purchases of Treasurys and mortgage-backed securities.

Long-term yields for government debt have been trending lower, despite the Fed’s tapering plans and rising inflation. That dynamic has helped to fuel buying in non-yielding assets, such as gold and bitcoin, and risky growth investments that are sensitive to rising yields. Stocks also have been climbing, with the Dow Jones Industrial Average DJIA, -0.39%, the S&P 500 index SPX, +0.10%, the Nasdaq Composite COMP, +0.56% and the small-capitalization Russell 2000 index RUT, +0.87% all touching records recently, along with bitcoin because of the belief that lower yields offer few viable alternatives for long-term investors.

“The macro situation is especially interesting for BTC in that a market in which you have bonds and equities rallying is one in which traditional investment theories no longer work. This alone could encourage traditional investors to broaden horizons and consider new types of assets,” Acheson writes.

“Bitcoin continues to show Wall Street that it is a bona fide inflation hedge,” wrote Edward Moya, senior market analyst at Oanda Corp., in a Wednesday note.

Bitcoin has only been in existence since around 2009 so it isn’t clear if it is a bona fide hedge against rising pricing pressures, to be sure.

However, Wall Street is increasingly treating it as if it were one.

A report from JPMorgan Chase analysts last month said that investors have been ramping up investments in bitcoin rather than gold.

“The reemergence of inflation concerns among investors has renewed interest in the usage of Bitcoin as an inflation hedge,” the investment bank report said.