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Bitcoin or Ethereum? Which is a better hedge against inflation

·Finance reporter
·4-min read
A composite image showing some Ethereum and Bitcoin tokens on the left, and some gold bars on the right.
Can cryptocurrencies replace gold as the best hedge against inflation? (Source: Getty)

Inflation has become a huge talking point among investors and crypto enthusiasts, and many are now considering digital currency as potential protection against rising consumer prices.

You may have noticed that everything from fuel to milk has become much more expensive, while wages haven't gone up, leaving many people struggling financially world-wide.

On Wednesday, the US Labor Department announced the consumer price index (CPI) - which measures what consumers pay for a wide range of goods - rose 0.5 per cent last month compared with November 2021, and 7 per cent compared with December 2020.

Ever since Fed chairman Jerome Powell and Treasury Secretary Janet Yellen finally admitted the current US inflation rates weren't temporary, investors have become intent on finding protection against it.

Inflation can also be viewed as a measure of rising prices of goods and services in an economy.

For an asset to be considered a store of value, it should be expected to hold its purchasing power over time, meaning it should either remain stable or increase in value.

So, can we hedge against inflation with Bitcoin and Ethereum?

Bitcoin

According to Motley Fool, Bitcoin has real potential as an 'inflation hedge'.

"One of Bitcoin's most significant advantages over other cryptocurrencies, and even fiat currencies such as the US dollar, is that it's said to hedge against inflation over time.

Unlike other currencies, there is a limited supply of Bitcoin tokens (21 million). According to current projections, the cap should be reached around the year 2140.

A Bitcoin being held against a representation of a globe.
Bitcoin is the world's biggest cryptocurrency to date. (Source: Getty Images)

Its finite supply of tokens may well help Bitcoin hold its value.

Traditionally, gold has been considered the strongest hedge against inflation.

The supply of gold has been relatively constant over time, hence its strong correlation with inflation.

As inflation increases and the US dollar loses buying power, the value of gold tends to increase.

However, as inflation has swelled over the past year, gold has underperformed.

In October of 2021, JP. Morgan said: “Institutional investors appear to be returning to Bitcoin, perhaps seeing it as a better inflation hedge than gold.”

However, there are experts who disagree, including Oanda senior market analyst Ed Moya.

"Over the past two months, Bitcoin [has] been a terrible inflation hedge. Yes, it has shown signs of being an inflation hedge. But by no means is it one," Moya told Fortune in December 2021.

So far, Bitcoin is failing to hold much weight as an inflation hedge, but a lot can change in a year.

Representation of an Ethereum cryptocurrency.
Ethereum had a record-breaking year in 2021. (Source: Getty)

Ethereum

A study carried out by researchers from the University of Sydney and Macquarie University claimed Ethereum may have the potential to replace Bitcoin as the leading inflation hedge.

"Following the recent change in its transactions protocol, Ethereum displays a significantly lower net issuance rate of tokens than Bitcoin, achieved by destroying the fees associated with each transaction," the study's authors said.

"In many cases, the amount of Ethereum burned outpaces the network's creation of new tokens, resulting in Ethereum potentially becoming the world’s first deflationary currency."

The researchers further explained that as cryptocurrencies had become more accepted mainstream, investors now viewed the digital assets as a better hedge over gold.

They said this was due to the rise of DeFi, which is an alternative financial infrastructure built on the Ethereum blockchain. DeFi has grown to more than $113.4 billion of funds locked in smart contracts.

Combine that with the increasing popularity of non-fungible tokens (NFTs) - the majority of which also use the Ethereum network - and Ethereum is set to grow exponentially.

So, at this point, it's difficult to determine which cryptocurrency provides a better hedge against inflation, but as the new year progresses, it will become clearer.

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