Analyzing Bitcoin’s Inflation-Hedging Capacity Through Stochastic and Econometric Models

This study comprehensively investigates Bitcoin’s efficacy as a hedge against inflation through an integrated stochastic modeling and econometric framework. Utilizing daily Bitcoin and gold prices (2015-2024) and monthly U.S. CPI inflation data, we model Bitcoin’s extreme volatility characteristics using Geometric Brownian Motion (GBM), Merton Jump-Diffusion, and GARCH-family specifications. The inflation-hedging effectiveness is quantitatively assessed using correlation analysis, regression frameworks, and hedging metrics. Results demonstrate that Bitcoin exhibits weak and statistically insignificant correlation with inflation (? = ?0.014, p = 0.4876), comparable to gold’s performance (? = 0.025, p = 0.2228). Among all models, ARIMA- EGARCH provides the best fit (AIC = -8841.98). Hedging effectiveness measures reveal minimal variance reduction for both Bitcoin (0.0202%) and gold (0.0624%). The findings challenge Bitcoin’s classification as ”digital gold” and suggest it behaves primarily as a speculative asset rather than a reliable inflation hedge during the study period.