Bitcoin vs. Gold: Which Can Beat Inflation?

Both gold and Bitcoin have hit record highs this year, but their sharp rises 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 rate cut in 2025, sparking concerns on Wall Street, with the Dow Jones Industrial Average falling more than 1,000 points. At present, the US economic growth remains strong and inflation remains high. Therefore, although the Fed cut interest rates as expected, concerns about inflation are a key reason for the sharp rise in the 10-year Treasury yield.

The prospect of continued inflation could provide a tailwind for gold and Bitcoin, but the reality is more complicated than the asset's advocates 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, and Bitcoin is produced by "mining," with a fixed total supply of mineable Bitcoins.

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

The argument for hedging against inflation is easy enough, but reality doesn’t always match theory. Bitcoin and gold both fell on Wednesday as concerns about inflation pushed up long-term interest rates.

Bitcoin prices were trading near $105,000 before the Fed’s rate decision on Wednesday, before falling sharply to $98,000, according to CoinDesk. 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 is also mixed. Both gold and Bitcoin have risen and hit all-time highs this year, but their sharp rises began long after inflation peaked in June 2022, with gold returning -0.4% in 2022 and Bitcoin plummeting 64%.

Why does this happen? Investors do buy gold to protect their portfolios from inflation, but the price of gold also reflects another countervailing force: interest rates. Since 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 despite high inflation, short-term Treasury bonds are more attractive to investors than gold.

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 don’t work as short- 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 retained its value over thousands of years.”

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

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