Cryptocurrency's Inflation Protection Hype Put To The Test: History Found Lacking

Rating agency S&P Global on Tuesday acknowledged the potential of cryptocurrencies as assets that can protect investors from inflation.

However, the rating agency emphasized insufficient data to back up this assertion. "Crypto assets could theoretically be a hedge against inflation," the New York-based agency stated in a press release to Coindesk, pointing to adoption in some emerging markets with high inflation.

Nonetheless, S&P Global remarked, "We think the track record for crypto is too short to prove this," referring to Bitcoin's weak correlation with U.S. inflation expectations.

Crypto proponents often view Bitcoin BTC/USD as a store of value assets, similar to gold, due to its programmed supply reduction every four years.

While the broader crypto market is seen as an alternative to the centralized fiat banking system, historical data contradicts the inflation hedge narrative.

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S&P Global found that the correlation between daily returns of their crypto index and U.S. breakeven inflation expectations is only 0.10.

A strong correlation of at least 0.75 would be necessary to validate the theory.

In contrast, the agency highlighted gold's consistent tracking of inflation expectations since 2013, noting, "There is evidence of Granger Causality between the 10-year Breakeven Inflation Expectation index and the S&P GSCI Gold index at a 95% confidence level."

This test, however, fails for Bitcoin.

S&P Global also observed that cryptocurrencies appear sensitive to the cost of borrowing in the economy and tend to move inversely to the U.S. two-year Treasury yield.

The agency found that "interest rates [two-year yield] and the crypto index have exhibited an inverse relationship 63% of the time since May 2017," which increased to 75% since May 2020, following the COVID-19 pandemic's onset.

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