Bitcoin and inflation: Can Bitcoin save you from inflation?

US stocks started trading Monday in bearish territory mainly due to inflation fears. On Friday, the Bureau of Labor Statistics reported that the consumer price index (CPI) had gone up 8.6% in May this year compared to last year, which was the highest increase since 1981. When compared to April, CPI had gone up 1% against estimates of 0.7% while core inflation went up 0.6% against estimates of 0.5%. 

How financial markets reacted to inflation report

And it’s not just US stocks that have been affected by the rising inflation. Asian stocks have also slumped to the lowest levels in three months as the MSCI Asia Pacific Index slipped as much as 2.8% on Monday, illustrating the widespread concern over inflation. With investors fleeing the stock market, cryptocurrencies are being seen as a viable alternative and Bitcoin is perhaps the top consideration. 

The problem is, there seems to be a correlation between cryptocurrencies and the equities market that may not shield crypto investors from inflation. This is because both equities and digital assets are considered riskier in comparison to bonds. Since the release of the CPI report, Bitcoin has dropped by more than 20% in tandem with the stock market. As a result, the cryptocurrency may no longer be the safe haven asset it was once assumed to be.

Interestingly, even the bond market took a dive on the back of the news, prompting some experts to say there was “nowhere to hide”. However, when looking at Bitcoin’s past performance against the stock market, it tells a different story. Bespoke Investment Group ran a hypothetical strategy dating back to the start of 2020 in which Bitcoin was bought and sold between the close and open of the NYSE compared to when it was bought during the market’s open hours. 

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The good news

Since the start of 2020, Bitcoin generated 260% returns when traded while the stock market was closed and just 3.6% when traded while the stock market was open. This proved that, although slightly correlated to the equities market, Bitcoin still had higher yields and could, therefore, become a shield against inflation.