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Embattled Markets Revive Bitcoin Inflation Hedge Argument

2 mins
Updated by Geraint Price
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In Brief

  • Pound sterling to Bitcoin trading volumes surged following the announcement of former British Prime Minister Liz Truss’s mini-budget last month.
  • The incident, and prevailing market conditions around the world, have seen Bitcoin’s appeal as a safe-haven asset return.
  • Since then, Truss resigned, and the selection of her successor has restored confidence in Britain’s economy.
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Growing economic instability, especially in the United Kingdom, has seen investors swarming back to Bitcoin as an inflation hedge.

Britain’s former Prime Minister Liz Truss unveiled her economic agenda of sweeping tax-cuts on Friday, Sept. 23. This promptly sent U.K. bond yields soaring, markets into turmoil, and investors back to Bitcoin. 

The following Monday, exchanges experienced a record spike in sterling to Bitcoin transactions, amounting to £846 million ($955 million). This led to trading volumes between the pound and Bitcoin skyrocketing 233% in Sept. over the previous month.

While distinct, similar uncertainty in the Euro area due to the war in Ukraine saw this figure jump to 68%.

The unrest caused by Truss’s “mini-budget” also caused the pound to drop to its lowest ever against the dollar, and its volatility to spike.

Remarkably, as Bitcoin’s volatility shrank to its lowest so far this year, it nearly matched that of the pound. Even the volatility of safe-haven assets such as U.S. bonds have recently matched or exceeded that of Bitcoin’s.

Bitcoin Inflation Hedge Argument Resurfaces

As a form of digital gold, cryptocurrency advocates have argued Bitcoin similarly acts as a safe-haven asset. One reason is because Bitcoin is independent of any centralized authority, such a central bank, which could manipulate its supply.

Additionally, with Bitcoin capped at a supply of 21 million, proponents also believe it serves as a hedge against inflation. 

However, even as its price dropped, institutional investment in the cryptocurrency continued to rise over the past year. This caused it to trade more similarly to other risky traditional assets, weakening Bitcoin’s case as an inflation hedge.

Yet, recent events have seen this argument resurface, especially Bitcoin’s recent movements in relation to the aforementioned asset.

Not only have correlations with riskier assets diminished, like with the tech-heavy Nasdaq, Bitcoin has been increasingly trading like gold.

Safety with Sunak 

In the meantime, Truss resigned as Prime Minister, and the ruling Conservative Party subsequently chose Rishi Sunak as her replacement. The elevation of Sunak, who previously served as Chancellor of the Exchequer, restored confidence in Britain’s economy. 

Consequently, trading volumes between sterling and Bitcoin have returned to levels prior to the mini-budget announcement. However, the incident, and prevailing market conditions, have demonstrated the appeal of Bitcoin in a crisis.

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Nicholas Pongratz
Nick is a data scientist who teaches economics and communication in Budapest, Hungary, where he received a BA in Political Science and Economics and an MSc in Business Analytics from CEU. He has been writing about cryptocurrency and blockchain technology since 2018, and is intrigued by its potential economic and political usage.
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