 A hedge against inflation. A store of value. Digital gold. These have been some of Bitcoin's main selling points. But while inflation in the United States reached the record highs this year, Bitcoin is still down around 50%. So has Bitcoin lost credibility as a hedge against rising prices? Stephen Lukka, the head of private client services at Swan Bitcoin, thinks the issue is more nuanced. There's been like a radical loss of abundance. Bitcoin isn't going to protect investors from that. In this video, we talked with Stephen about the definition of inflation, how can people get protection from it, and why Bitcoin can still be seen as an inflation hedge. But before we start, don't forget to subscribe to our channel. I'm Giovanni, your host, and this is a Cointelegraph interview. So I wanted to discuss with you the narrative of Bitcoin being a hedge against inflation. So a lot of people might be disappointed about this narrative this year because despite inflation has soared and the prices of goods have been going up, Bitcoin hasn't served as a hedge against inflation. Bitcoin has been going down together with stocks and other risk on assets. Why should people still trust Bitcoin as a hedge against inflation? Yeah. So this all comes back to how we define inflation. And I'm going to try actually not to use the word inflation. I might not succeed, but as we go on here. So there are two phenomena that people generally define as inflation or at least have throughout history. The common one today is the price of goods going up. And so things getting more expensive and that's what CPI measures. And so when people are looking at inflation at record highs, what they're talking about is CPI going up. They're talking about the cost of goods going up. And what I'm saying, the measure of inflation is monetary expansion. And so historically, this was how inflation was measured. It was when more monetary supply was brought onto the market and was created. And so when we look at Bitcoin through that lens, what we see is that Bitcoin did very well when we were on a high monetary expansion environment. And so when they were issuing a lot of stimulus checks and PPP loans at the beginning of COVID, Bitcoin did extraordinarily well. And Bitcoin went from like, I think if you bought Bitcoin before the stimulus was announced or the day the stimulus was announced, you got it at like $8,000. That might not be exactly accurate. And it went to 69. And even today it's at 23. So you're up a well bit over 100%. And so if you bought Bitcoin before the monetary expansion, even with the price drop, you have hedged your increases in the price of goods. You've done well. And so my argument is that Bitcoin goes up when there is monetary expansion, one. And two, Bitcoin protects investors from the increase in the cost of goods when that is driven by monetary expansion. There is another way that goods can go up and the price of things can increase. That is separate from monetary expansion. And this is when there are essentially critical shortages. But in a world where the price of goods is going up because there's been like a radical loss of abundance, Bitcoin isn't going to protect investors from that. So as we get to 2022 and real structural shortages of commodities and of goods and trade limitations become a huge factor, both Bitcoin and gold don't do well. There's a huge monetary contraction. There's these huge shortages. And so yes, CPI is going up, but it's a very different sort of CPI going up than the way that prices increase when they create a bunch of money. Okay, now let's talk about some of the criticism against this narrative of Bitcoin being a hedge against inflation. So there was an interesting article in Bloomberg by Joe Wiesenthal, which addresses some of the points you're making. So he thinks that a hedge is basically an instrument that allows people to protect themselves from something bad. So a hedge against inflation is an instrument that people use in order to protect themselves against the rise of prices of goods and services. Still, as you mentioned, back in 2020, when there was this monetary expansion, this money printing from central banks, we saw that Bitcoin was doing very good, was skyrocketing. This year, where people have the most need of something to protect them from rising prices in goods and services, they don't have Bitcoin as a hedge. Bitcoin is not helping them as a hedge. What would be your response to this argument? You need to own a hedge before the thing happens, right? Like if you wait till inflation's at 6% and then you buy an inflation hedge, it's too late. Markets are forward looking. So I would argue that the increase in the price of Bitcoin at the time that we knew a bunch of money creation was going to happen, you had to own it then when the market came to understand that consumer price increases were a real possibility driven by monetary expansion. So first of all, you do have to own it before. And I think that's true with anything. But the other angle there is inflation is a consumer price increases are a lagging indicator. And what I mean by that is when money creation occurs or even supply disruptions occur, you don't immediately see the prices of goods go up. And then even the Fed's reporting of CPI, the government's reporting of CPI, it's backward looking, right? It's not in real time. So the inflation number, the consumer price increase numbers that we're seeing, it takes a while for the impact to actually show up there. So it's a lagging indicator. And one other point is that the impact of a monetary expansion on consumer prices is uneven and variable based on the type of monetary expansion that is taking place. So stimulus checks and PPP loans are like the most consumer price inflationary way to create more money. It puts actual dollars directly in the hands of normal people and they spend it into the economy. So that's going to have the most direct impact on price increases compared to something like QE. Now, and so Joe in that in that in that section talks about how CPI was low in the late 2000s, early 2010s. And that was the era of QE. Now QE is funny because QE is essentially a recapitalization of banks. And so that money doesn't intrinsically just by doing QE go into the economy. But what does happen is because we supply the banks with more dollars, those dollars find their way into capital markets. And so they drive up assets. And so you see asset price inflation. Now I make the argument that when asset prices like stocks go up in a way that is not commensurate with real world productivity gains like a physical world that is not more abundant or a digital world that's more efficient. That is monetary expansion. And so like in the example of QE, dollars are created from thin air. They're put into bank balance sheets. They recapitalize the banks. At that point, it's not inflationary. But the moment those banks use those dollars to buy assets, then assets start going up for no better reason than more dollars were created. And that is the definition of inflation as I see it. So when you see asset price inflation, which is the decade that Joe is pointing to, it didn't show up in CPI nor should it. But that was still something people needed to hedge against. And this is where I really disagree. Because let's just say, let's say you're all in cash, all you own is cash. And the Fed does QE and the S&P 500 is up 100% in three years. And houses are up 30%. And you were in cash, you own no assets. It now costs 30% more dollars for you to buy a house. And every one of your peers and everybody in the economy around you has a larger share of the money supply because they owned assets. So you are now in a very real way poorer than everyone else who owned assets. And it costs you more to buy assets, including homes. The Bloomberg article I mentioned says, why then not hold directly those assets that are going up in price? Like houses, for example, back in 2020, before these monetary expansions, before the following inflation, if you bought a house back then, right now, perhaps, you would have a better hedge against inflation than Bitcoin. Don't you think so? Well, so it didn't, right? If you bought real estate in 2020 at the peak of the COVID crash and you bought Bitcoin, Bitcoin did much better even today unless there's some really insane real estate market in some corner of the United States. But you had to get that one. On average, home prices are up, I don't know, what is it, 30%, 35%, which is enormous, right? But if you bought Bitcoin in March of 2020 or even after the crash, even at 8,000, which you had plenty of time to do, you're up more than that. And that is essentially, I'll add to that. So that's essentially my argument. I kind of said it earlier. So Joe says, why not just buy assets? If you're just trying to hedge asset inflation, just buy assets. And this is where we come back to my point that you're trying to turn houses and equities into stores of value. And that is not what those things are. They are not stores of value, right? You are taking on additional idiosyncratic risks that Bitcoin does not have. So Bitcoin doesn't have those risks of stock picking or picking a home and dealing with it. Imagine a natural disaster occurs, right? Imagine there's a hurricane, like you just took a huge cost. So Bitcoin doesn't have those risks. And Bitcoin also outperformed those things in general. It's a more pristine, it is generally, I'm going to make the argument that Bitcoin in an era of monetary expansion and in periods of monetary expansion is going to outperform housing and stocks, at least as an asset class. I guess a lot of this comes down to the time frame you're looking at, right? So, of course, if you look at specific years, for example, 2018 and even this year so far, Bitcoin hasn't been working very well as a hedge against inflation. Although if you widen this time span and you look back into a 10 years time frame, for example, then you find out that Bitcoin has been working amazingly as a hedge against inflation. Even shorter time frames, even just 2020 to now, right? Like even shorter time frames. And I've just been talking about price performance, which obviously is something a lot of people are thinking about and talking about and we have to talk about in terms of its role in a market. But there's another question of societal benefit. Is it good that real estate functions as a store of value? Like is that good for society? I would say no, it's not good. Like houses should be able to be built and rented at a profit. Like I'm not arguing for not having a market with houses, but they command a huge store of value premium in a world that constantly needs to invest their cash. And what that does is it makes it less affordable for people to be able to buy a home. That's not good for society. I strongly believe it would be a very big benefit to America and to any civilization. To use something like Bitcoin that serves no other purpose besides being money instead of using homes which people need to live. Not everyone can afford to buy a house to hedge against inflation. The same for stocks, gold. Those assets are not as easily accessible as Bitcoin is in many parts of the world. And yes, Steven, thanks a lot for coming on our show. I hope to see you soon here again. Sure. Love to be on again. Thank you for having me. It was great talking.