Cryptocurrency as an inflation hedge: insights from Indian household behavior
This paper by Lin William Cong, Pulak Ghosh, Jiasun Li, and Qihong Ruan provides the first direct, micro-level evidence that rising inflation expectations drive both increased investment and new adoption of cryptocurrencies—especially Bitcoin and Tether—as inflation hedges among Indian households.
Data sources: The study uses proprietary, granular trading data from the largest cryptocurrency exchange in India, covering over 85 million transactions from January 2018 to June 2022. Each transaction includes detailed demographic information (age, gender, city, pincode) for both buyers and sellers. This is matched with localized inflation expectations data from the Reserve Bank of India’s Inflation Expectations Survey of Households (IESH), which is conducted every two months and provides inflation expectations at the pincode and demographic level.
Empirical strategy: The main empirical approach is a Fama-MacBeth regression, which is well-suited for large cross-sectional datasets with infrequent time-series observations per individual. This method estimates the relationship between local inflation expectations and subsequent net cryptocurrency purchases (in INR) at the individual level, controlling for age and gender.
Findings
- Positive association: There is a statistically and economically significant positive relationship between household inflation expectations and individual cryptocurrency purchases. On average, a 1 percentage point increase in one-year-ahead inflation expectations is associated with an increase of over ₹1,000 in net cryptocurrency purchases per investor before the next survey (about two months later).
- Causality and robustness: The relationship holds after controlling for speculative motives (using survey data on investors’ expected crypto returns) and remains robust under various IV strategies, supporting a causal interpretation.
- Extensive margin: Higher inflation expectations also lead to more new investors joining the exchange. A 1 percentage point increase in inflation expectations is associated with approximately 1,000 additional new investors across the sampled pincodes.
- Concentration in specific cryptocurrencies: The effect is concentrated in Bitcoin (BTC) and Tether (USDT, a USD-pegged stablecoin). No significant relationship is found for most other cryptocurrencies.
- Geographic and demographic heterogeneity: The positive relationship between inflation expectations and crypto investment is most pronounced in semi-urban areas, compared to urban or rural regions. Among crypto investors, there is no significant difference in the inflation-expectation-investment relationship by gender or age, although men and younger people generally have lower inflation expectations in the broader population.
Inflation Expectation and Cryptocurrency Investment
Authors: Lin William Cong, Pulak Ghosh, Jiasun Li, Qihong Ruan
From: Cornell University, Indian Institute of Management, George Mason University
Bitcoin’s evolving inflation-hedging role
Harold Rodriguez and Jefferson Colombo, in this paper, take a different approach in analyzing whether Bitcoin can act as a hedge against inflation by looking at the effect of inflation shocks on Bitcoin returns. The authors use monthly data from August 2010 to January 2023, focusing on U.S. inflation surprises (measured as the difference between actual and expected CPI and Core PCE announcements), Bitcoin returns, gold returns, S&P 500 returns, U.S. 1-year Treasury yields, and VIX index changes. They employ Vector Autoregressive (VAR) models. Inflation shocks are identified as “surprises” in inflation announcements—unexpected deviations from market expectations—rather than just observed or expected inflation.
Findings
- Bitcoin as an inflation hedge: Bitcoin returns generally increase following positive inflation shocks (measured by CPI surprises), suggesting that Bitcoin can act as an inflation hedge, especially in the early years of its existence.
- Sensitivity to price index: The inflation-hedging property is sensitive to the price index used. Positive effects are observed for CPI (month-over-month and year-over-year) but not for Core PCE (month-over-month), where returns may even become negative.
- Time dependency: The hedging property is most pronounced in the early period of Bitcoin’s existence and diminishes as institutional adoption increases. Specifically, the inflation-hedging effect of Bitcoin disappears after the outbreak of COVID-19, while gold’s hedging properties strengthen during this period.
- Comparison to other assets: Bitcoin’s response to inflation shocks is similar to gold and real estate (both positive), but contrasts with the S&P 500 and corporate bonds (negative or neutral).
- Variance decomposition: The relationship between Bitcoin returns and inflation is weaker than that between gold returns and inflation, indicating gold is a more reliable inflation hedge.
- Context-specific nature: The authors conclude that Bitcoin’s ability to hedge against inflation is context-specific, depending on the inflation index and the period analyzed. As Bitcoin becomes more mainstream, its inflation-hedging properties may continue to diminish.
Is bitcoin an inflation hedge?
Authors: Harold Rodriguez, Jefferson Colombo
From: Sao Paulo School of Economics
