Is bitcoin an inflation hedge?

Spot bitcoin ETFs have been recently approved in the U.S., increasing retail and institutional investors' attention to the crypto space. Still, empirical evidence on whether Bitcoin is an asset that protects investors against inflation is still inconclusive. To contribute to this debate, we analyze the effect of inflation shocks on bitcoin returns through the estimation and inference of Vector Autoregressive Models (VARs). Unlike previous research on the topic, we identify inflation shocks as surprises in the US’s CPI and Core PCE announcements: the difference between the announced inflation and the analysts’ consensus. The results, based on monthly data between August 2010 and January 2023, indicate that bitcoin returns increase significantly after a positive inflationary shock, corroborating empirical evidence that Bitcoin can act as an inflation hedge. However, we observe that bitcoin’s inflationary hedging property is sensitive to the price index -- it only holds for CPI shocks -- and to the period of analysis –- the hedging property stems primarily from sample periods before the increasing institutional adoption of BTC (``early days''). Thus, the inflation-hedging property of Bitcoin is context-specific and is likely to be diminishing as adoption increases. This research contributes to the still under-explored strand of literature that analyzes the hedging and safe-haven properties of Bitcoin and benefits asset managers, investors, and monetary authorities.