Gas Prices Are Skyrocketing. Can Bitcoin Actually Hedge Against Inflation?

As of Oct. 19, the cost of gasoline is $4.30 per gallon, a shocking 41% higher than one year ago. Since a major driver of the increase is the ongoing U.S.-Israel war with Iran -- which seems to be dragging on and leading to the destruction of more oil-related infrastructure despite constant assurances that it's on the verge of ending -- it's likely that gas prices will rise even further. As energy is an input into most other physical things, that means inflation may roar.

So can Bitcoin (CRYPTO: BTC) help?

Bitcoin is often proposed as a way to protect portfolios from inflation. Here's how that might work in the context of this energy shock, rather than in the context in which its hedging is usually discussed (governments printing more money).

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Energy prices are up 20% in a year, and they could go even higher

Per the Bureau of Labor Statistics (BLS), the Consumer Price Index (CPI) is up 3.7% in the 12 months through September. Energy costs climbed 20.4%, largely driven by higher gasoline prices. Core inflation, a narrower measure that excludes categories like food and energy, was up by 2.6%.

Bitcoin, for its part, is up 23% in the last three months, and down 24% over the last 12 months. So it's difficult to say that the coin is a good inflation hedge without adding some significant qualifications.

The main problem here is that a digital asset simply cannot compensate for insufficient barrels being delivered from oil-producing regions to the pumps.

Worse, energy shocks tend to provoke a Federal Reserve response, and Bitcoin tends to fall when the Fed signals tighter policy. On Sept. 16, the Fed raised interest rates for the first time since 2023. Based on the hot producer and consumer inflation prints on Oct. 14 and 15, more hikes could be on the way quite soon. Higher rates make it more appealing for investors to hold safer assets like Treasuries, which offer yields, rather than riskier assets that don't, like Bitcoin.

One 2023 study, bluntly titled "Bitcoin Does Not Hedge Inflation," suggests that Bitcoin tends to fall during inflation scares. A different 2024 paper by a pair of economists at the São Paulo School of Economics also suggests that Bitcoin may have been an effective inflation hedge earlier in its history, but now that it's widely held by institutional investors, it isn't as effective at that task as it was before.

What's more, over the last five years, during which inflation has consistently run well above the Fed's 2% annual target, Bitcoin's price is up 32%. Gold, the traditional inflation-resistant asset, is up by 129%, and the S&P 500 is up by 69%.

Consumer prices rose 22.8% from September 2021 to September 2026, per the BLS, so Bitcoin did beat inflation across five years. However, it trailed gold and stocks by a wide margin, and it has lost ground to inflation over the last 12 months.

What kind of inflation can Bitcoin hedge?

Bitcoin is still likely an asset that can protect investors from inflation.

Bitcoin is mainly a bulwark against currency debasement, the dramatic erosion of a currency's purchasing power, most often caused by governments creating new money faster than the underlying economy grows. It can succeed against debasement because no matter how much money gets printed, it's simply impossible to print more Bitcoin.

Since the April 2024 halving, Bitcoin's supply has grown at about 0.85% per year as its remaining supply is slowly mined. The dollar has no such rate limiter on the growth of its supply, and it's exactly that growth which is and will continue to be a major driver of inflation in the U.S.

According to the Committee for a Responsible Federal Budget, the federal debt load is expected to rise from about 100% of gross domestic product (GDP) in 2026 to 120% by 2036. A government carrying that debt may be tempted to run inflation hotter than normal, thereby reducing the debt's real burden. That's where Bitcoin works best as a hedge against inflation.

Still, that hedge actually working well is entirely unproven at this juncture.

That argues for holding other assets that will hold up against inflation, such as gold, index funds, and real estate, as well as some Bitcoin. After all, even if it doesn't have the same history as gold, it's easy to see that Bitcoin's value isn't about to be inflated away anytime soon, whether or not it keeps up with gas prices during a major war.

Alex Carchidi has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.