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Is Bitcoin a good hedge against Inflation?

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Bitcoin is frequently mentioned by cryptocurrency advocates as a hedge against inflation.

The pandemic provided excellent conditions for putting this theory to the test, as governments throughout the world began pumping trillions of dollars into their economies.

Will Bitcoin serve as a safe haven for investors while global economies struggle to stabilize?

 

The Curse of Inflation

Source: Pixabay

 

The Curse of Inflation

In fiat money economies, inflation is not a surprise; it is unavoidable. As a result, for a long time, investors, economic experts, and individuals have been looking for realistic ideas to implement in order to escape it. Gold, stocks, and real estate, for example, have long provided relief to investors who are concerned about losing the value of their investment due to inflation.

Bitcoin, the world’s largest cryptocurrency, has been one of the best financial assets to hold, increasing more than 4,700% in the last five years.

Aside from the chance of significant financial appreciation, investors may turn to bitcoin to safeguard themselves against inflation. Is bitcoin, nevertheless, a viable wallet supplement for hedging against rising economic prices?

 

Bitcoin as a digital Gold

Historically, investors have resorted to gold to hedge against inflation. The premise is that when consumer prices rise, so should the cost of a hard asset like gold, since the dollar (or euro) loses value. However, the history of gold as an inflation hedge is questionable. There have been moments of significant inflation, particularly in the 1980s, when gold ownership would have resulted in negative returns.

Bitcoin, like gold, is distinguished by scarcity and a lack of correlation with other financial assets. There is only a finite amount of gold in the world, and no more than 21 million bitcoins will ever exist. Because of the supply cap, prices rise as demand for the asset rises.

However, because bitcoin is such a new asset class, its price today is determined solely by speculation rather than inflation. Perhaps, as cryptocurrency acceptance grows and volatility falls, bitcoin will become a major competitor to gold in the eyes of investors.

 

Can Bitcoin Fight Inflation?

Bitcoin is a deflationary asset, which is why citizens of countries with unstable fiat currencies are increasingly utilizing it as a store of value to protect themselves from hyperinflation and rising prices for common goods and services. Crypto, unlike fiat, cannot be manipulated to the same extent by changing interest rates and increasing money production. Most significantly, the supply of Bitcoin will never surpass 21 million, making it an appealing inflation-resistant store of value. While Bitcoin has grown in popularity over the last year, the volatility nature of the crypto market remains a contentious issue.

 

Stablecoins as an alternative 

Cryptocurrencies frequently endure sharp price fluctuations, making them an unappealing store of value for many. While a 30% loss in price over 24-48 hours is considered uncommon and terrible in traditional markets like as stocks, such events are very regular in the cryptocurrency market. If you’re concerned about the volatility of cryptocurrency, try adopting stablecoins such as BUSD.

 

Some Enthusiasts Have Said That Bitcoin Is Not a Hedge of Inflation

Inflation is the loss of a currency’s purchasing power as a result of rising economic prices. The Consumer Price Index is the most extensively used metric (CPI). In November 2020, the CPI in the United States increased by 6.8 percent over the previous year, the highest increase in 39 years (only 2.8 percent in France, which remains moderate). This increase can be attributed to an unanticipated surge in consumer demand when economies reopen in early 2021, as well as unprepared supplier systems and unprecedented government support.

The bitcoin release timetable functions quite differently from central bank money production and, as a result, should not be classified as inflation. The correct approach would be to consider the 21 million bitcoins as if they already existed, with the exception that some remain unclaimed. Thus, Bitcoin mining would be a type of “original appropriation” rather than inflation.

 

 

What Exactly Is An Inflation Hedge?

An inflation hedge is a financial instrument that moves in the same direction as and to a larger extent than the consumer price index (CPI). As a result, as the prices of products and services grow, the specific asset in question should rise as well. As a result, an investor’s price power does not deteriorate with time.

Bitcoin’s Recent Behaviour?

The cryptocurrency has lost 23% of its value in the last two months. As a result, even with current historical inflation, bitcoin does not qualify as a true hedge against inflation according to this definition.

However, if we use a different approach, a more important concept emerges. The most important thing to do to protect against the threat of rising prices, which is a feature of a stable and running economy, is to possess assets whose value tends to expand faster than the rate of inflation. As a result, you do not lose purchasing power in the long run. You can, infact, increase your purchasing power. This is where Bitcoin shines as an inflation hedge.

 

Is Bitcoin a deflationary currency? Why?

Because, rather than “creating new currency,” you may view mining to be simply “allowing” more coins from each block out of a total of 21 million coins. Everyone understands that there will eventually be 21 million coins, but not all of them can be spent.

 

Does Inflation Skyrocket When The Government Prints Money?

The Federal Reserve of the United States has set a 2% inflation objective based on the consumer price index (CPI). Despite inflationary expectations caused by pandemic-related spending, the United States’ inflation rate hovered around 1.5 percent in 2020, considerably below target.

Money velocity, which measures how quickly money changes hands in an economy, is one explanation for the relative stability of US inflation. Inflation can be kept in check if the money supply is expanded but people do not spend a lot of money soon.

Consumer expenditure fell worldwide after the pandemic, with nations such as the United States, India, Japan, and Germany reporting significant declines in household spending. As numerous states in the United States went into lockdown, individuals stayed at home instead of going out to eat, festivities and gatherings came to a halt, and travel came to a standstill.

People spending less meant that overall demand for products and services had decreased. According to the International Energy Agency, global energy demand fell by 6% in the first three months of 2020, the largest drop since World War II (IEA).

 

Conclusion

Bitcoin’s vision for the future may be enticing. The dream of a money that is not controlled by a small group of people, a currency that cannot be issued to bail out a small group of people or institutions. To be honest, it’s a really utopian dream right now. Bitcoin and other cryptocurrencies in the market are still mostly utilized for speculation and trading million bitcoins will ever exist. Because of the supply cap, prices rise as demand for the asset rises.

However, because bitcoin is such a new asset class, its price today is determined solely by speculation rather than inflation. Perhaps, as cryptocurrency acceptance grows and volatility falls, bitcoin will become a major competitor to gold in the eyes of investors.

 

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Disclaimer: Bitxmi News is a news portal and does not provide any financial advice. Bitxmi's role is to inform the cryptocurrency and blockchain community about what's going on in this space. Please do your own due diligence before making any investment. Bitxmi News won't be responsible for any loss of funds.

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