Bitcoin Does Not Hedge Inflation

TL;DR

This paper investigates how Bitcoin and other cryptocurrencies respond to macroeconomic news, finding Bitcoin reacts negatively to inflation surprises, challenging the belief that it hedges inflation.

Contribution

It provides empirical evidence that Bitcoin does not hedge inflation and identifies consumption-savings shifts as a key factor influencing its price response.

Findings

Bitcoin decreases by 24 bps after inflation surprise

Other cryptocurrencies show no reaction to macroeconomic news

Bitcoin's response is linked to shifts in consumption-savings decisions

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.