If you bought something for $100 in 1995, that same product would likely cost roughly $208 today. That's because inflation, which rose at an average rate of 2%-3% over the past three decades, consistently erodes the dollar's purchasing power.

The latest inflation spike, which started in 2021, was largely caused by volatile commodity prices, rising labor costs, supply chain disruptions, and geopolitical conflicts. Increased government spending during the pandemic exacerbated that pressure.

Some investors touted cryptocurrencies as a hedge against inflation. But the interest rate hikes in 2022 and 2023, which were necessary to counter inflation, drove investors away from cryptocurrencies and other speculative investments.

For now, cryptocurrencies might not seem like a reliable hedge against inflation. Yet Bitcoin (CRYPTO: BTC) , the world's most valuable cryptocurrency, could consistently rise over the next few decades and stay ahead of inflation.

Bitcoin could eventually become digital gold

Bitcoin is mined with the energy-intensive proof of work ( PoW ) mechanism, which currently requires dedicated miners running on application-specific integrated circuit (ASIC) chips. Nearly 20 million of Bitcoin's maximum supply of 21 million tokens has already been mined, and its last token is expected to be mined by 2140.

The rate of mining Bitcoin is slowing down because its mining rewards are cut in half every four years in scheduled "halvings." Bitcoin's most recent halving occurred last April, and each halving makes it more difficult to mine for a profit.

That increasing scarcity makes Bitcoin more comparable to gold than other cryptocurrencies, which are often staked through the more energy-efficient proof of stake (PoS) mechanism instead of being digitally mined. That's why the Securities and Exchange Commission (SEC) said Bitcoin is the only cryptocurrency that can be classified as a commodity instead of a security.

Bitcoin's bulls claim those qualities make it "digital gold" for the 21st century. If that's true, then it might be a great long-term hedge against inflation. If you had invested $100 in gold at the beginning of 1995, your investment would be worth about $740 today -- which would have easily offset the aforementioned inflation of the past three decades. If you invest in Bitcoin today, it might just go on the same inflation-beating trajectory over the next few decades (although there are no guarantees).

Bitcoin's price needs to stabilize

That outlook seems bright, but Bitcoin must overcome three major challenges before it's considered an inflation-beating investment. First, its price needs to stabilize. Over the past 52 weeks, its price has swung wildly between a low of $49,784 and a high of $109,012. By comparison, gold's price stayed in a narrower 52-week range between $2,088 and $2,974.

Unless Bitcoin starts trading in a tighter range, it will be hard for investors to take it seriously as a long-term hedge against inflation. It also won't be widely adopted as an alternative currency for payments as its price undergoes such wild swings.

Second, Bitcoin needs to attract more institutional investors. Only 38% of all institutional investors have committed 1%-5% of their portfolios to digital assets and crypto investments, according to a recent EY-Parthenon survey. But if those percentages rise over the next few years, Bitcoin's price could stabilize and gradually climb higher.

Lastly, Bitcoin must become more resistant to interest rate swings to be more comparable to gold. As inflation heated up between Dec. 31, 2021, to Dec. 31, 2023, gold's price rose 15% as Bitcoin's price dropped 11%. That divergence indicates it's premature to consider Bitcoin to be an inflation-resistant asset.

Why could Bitcoin become resistant to inflation?

Bitcoin will likely remain volatile over the next few years. But over the next few decades, its price could stabilize as institutional investors ramp up their purchases, more countries adopt it as a national currency, and it's more widely used for financial transactions. If that happens, Bitcoin could become a long-term hedge against inflation.

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