In the ongoing debate about the role of digital assets in modern portfolios, Bitcoin and other cryptocurrencies are often described as “digital gold”—a reliable hedge against inflation and economic uncertainty. However, analysts from Goldman Sachs offer a different perspective, comparing cryptocurrencies more closely to copper than to gold in terms of their inflation-hedging characteristics.
Understanding Inflation Hedging
Inflation hedging aims to protect investors from the declining purchasing power of money as prices rise. Assets considered good inflation hedges typically maintain or increase in value when inflation accelerates. Traditionally, gold has played this role due to its historical stability and universal acceptance.
Yet, not all inflationary environments are the same. As Jeff Currie, Global Head of Commodities Research at Goldman Sachs, explains, different types of inflation call for different hedging strategies.
How Cryptocurrencies Fit into the Inflation Narrative
The surge in inflation data throughout 2023, driven by post-pandemic recovery and expansive monetary policies, has renewed interest in assets that can preserve value. While cryptocurrencies like Bitcoin initially gained attention as modern inflation hedges, their recent performance suggests a more nuanced reality.
Gold has demonstrated resilience, climbing nearly $200 since April and reaching a four-month high, supported by a weaker dollar and rising inflation expectations. In contrast, Bitcoin, despite a year-to-date gain of over 25%, has declined by more than 25% in the past three months.
This divergence highlights a critical distinction between the two asset classes—one that aligns more with cyclical commodities like copper than with safe-haven assets like gold.
Goldman Sachs’ View: Bitcoin as a Risk-On Asset
According to Currie, cryptocurrencies behave more like “risk-on” inflation hedges—similar to copper or oil—which thrive in environments driven by demand-led inflation. These are conditions where economic growth stimulates demand, leading to price increases that are generally considered “good” or healthy inflation.
In such scenarios, investors often turn to assets like copper, oil, and—increasingly—cryptocurrencies. These assets tend to perform well when economic optimism is high, but they are also more susceptible to market sentiment and speculative trading.
Gold, on the other hand, serves as a hedge against “bad” inflation—situations where supply shortages or monetary instability lead to rapid price increases without corresponding economic growth. This makes gold a more reliable safe haven during periods of economic stress or policy uncertainty.
Commodities vs. Equities in Inflation Hedging
Goldman Sachs also emphasizes that commodities, as a whole, remain one of the most effective tools for hedging against near-term inflation risks. Unlike equities, which are forward-looking and depend on expectations of future earnings, commodities are spot assets whose prices reflect current supply and demand dynamics.
This makes commodities particularly useful when inflation surprises to the upside, often occurring in the later stages of an economic cycle when demand outstrips supply. Cryptocurrencies, with their high volatility and sensitivity to risk appetite, share more traits with cyclical commodities than with traditional safe havens.
Frequently Asked Questions
What is an inflation hedge?
An inflation hedge is an investment designed to protect against the decrease in purchasing power caused by rising prices. Traditional examples include gold, real estate, and certain commodities.
Why does Goldman Sachs compare Bitcoin to copper?
Both Bitcoin and copper are considered “risk-on” assets—they tend to perform well in high-growth, high-demand environments but are vulnerable to market sentiment and economic shifts. This contrasts with gold, which is viewed as a “risk-off” asset.
Can cryptocurrencies still serve as a hedge against inflation?
While cryptocurrencies may offer some protection in demand-driven inflationary environments, their high volatility and correlation with risk appetite make them less reliable than gold or broad commodities during periods of economic uncertainty.
What are the best assets for hedging inflation?
Physical commodities, Treasury Inflation-Protected Securities (TIPS), real estate, and gold are widely regarded as effective inflation hedges. The choice often depends on the type of inflation and the investor’s risk tolerance.
How does “good” inflation differ from “bad” inflation?
“Good” inflation is typically demand-driven and occurs when economic growth leads to higher prices. “Bad” inflation arises from supply constraints or monetary devaluation without underlying economic strength.
Should investors include cryptocurrencies in their portfolio for inflation protection?
Cryptocurrencies can be part of a diversified portfolio, but they should not be relied upon as a primary inflation hedge due to their volatility and speculative nature. Consider exploring more established strategies for long-term protection.
Conclusion
While the narrative of cryptocurrency as “digital gold” remains popular, evidence from market behavior and institutional analysis suggests that digital assets like Bitcoin function more like cyclical commodities such as copper. They may offer hedging benefits in growth-led inflationary environments but lack the stability and reliability of traditional safe-haven assets.
Investors seeking robust inflation protection should consider a diversified approach that includes physical commodities, gold, and other proven stores of value. For those interested in learning more about asset allocation in inflationary times, you can explore advanced hedging strategies.