Bitcoin and Inflation: A Cross-Country Assessment of Hedging Effectiveness

Abstract

This research investigates the potential role of Bitcoin as a hedge against inflation across various countries, utilizing data spanning from 2015 to 2024. As central banks confront the inflationary pressures intensified by the global pandemic and fluctuations in international money supply, Bitcoin has gained increased attention. Proponents of Bitcoin contend that, similar to gold and in contrast to government-issued currencies, it is decentralized and has a limited supply, which theoretically protects it from inflationary erosion. However, due to the high volatility and speculative nature of cryptocurrencies, their practicality for facilitating monetary transactions remains contentious. Grounded in the positivist paradigm, this study employs ordinary least squares regression, dynamic conditional correlation-generalized autoregressive conditional heteroskedasticity, panel fixed effects, and quantile regression methods, using monthly data on Bitcoin returns, inflation levels, and financial benchmarks across both developed and emerging economies. Empirical findings reveal that Bitcoin returns exhibit no significant correlation with inflation, either across the full sample or within advanced economies. The evidence explains that Bitcoin's valuation responds more to variables like exchange rates, interest rates, and speculative investor behavior than to inflation itself. Comparative performance analysis indicates that Bitcoin underperforms traditional inflation hedging instruments. During inflationary episodes, assets such as gold and Treasury Inflation-Protected Securities offer more reliable financial protection than Bitcoin. The study concludes that while Bitcoin does not effectively hedge against inflation, it may serve as a risk-diversification tool within portfolios under specific conditions. Due to its volatility, regulatory limitations, and weak inflation linkage, Bitcoin remains unsuitable for integration into conventional central banking frameworks. These insights offer practical implications for investors, portfolio managers, and policymakers navigating inflationary periods. Although Bitcoin may serve niche purposes, it should not be equated with traditional risk-hedging financial assets.

Keywords: Bitcoin, Inflation Hedge, Cryptocurrency, Emerging Markets