Bitcoin Does Not Hedge Inflation

Paper: arXiv 2301.10117

Authors: Mykola Pinchuk

Abstract

This paper examines the response of major cryptocurrencies to macroeconomic news announcements (MNA). While other cryptocurrencies exhibit no reaction to major MNA, Bitcoin responds negatively to inflation surprise. Price of Bitcoin decreases by 24 bps in response to a 1 standard deviation inflationary surprise. This reaction is inconsistent with widely-held beliefs of practitioners that Bitcoin can hedge inflation. I do not find support for the hypothesis that the negative response of Bitcoin to inflation is due to its negative exposure to interest rates. Instead, I find support for the hypothesis that Bitcoin is strongly affected by the shift in consumption-savings decisions, driven by the rise in inflation. Consistent with this view, Bitcoin has negative exposure to a proxy for the consumption-savings ratio.

Complexity vs Empirical Score

• Math Complexity: 3.5/10
• Empirical Rigor: 7.5/10
• Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper provides a strong empirical high-frequency event study challenging a popular practitioner narrative regarding Bitcoin as an inflation hedge. While using standard econometric techniques rather than complex mathematical derivations, its empirical design and clear testing of economic mechanisms (consumption-savings decisions vs. interest rate channels) make it highly compelling.

Research Flowchart

  flowchart TD
    A[Research Goal: Does Bitcoin Hedge Inflation?] --> B[Data Inputs: Macro Announcements & Crypto Prices]
    B --> C[Methodology: Event Study Analysis]
    C --> D[Result: Bitcoin drops 24 bps per 1 SD Inflation Surprise]
    D --> E{Hypothesis Testing}
    E -->|Interest Rate Exposure| F[Not Supported]
    E -->|Consumption-Savings Shift| G[Supported: Negative Exposure to C-S Ratio]
    G --> H[Outcome: Bitcoin Does NOT Hedge Inflation]