Bitcoin and Inflation. Many people believe that Bitcoin BTC $61,504 can protect them from inflation since fiat currency will lose value over time as central banks create more money. Conversely, there will always be exactly 21 million Bitcoins in circulation. Bitcoin has a leg up in the fight against inflation thanks to its limited upper limit.
As a result of the COVID-19 pandemic, the value of money fell as several governments printed more money to meet their residents’ stimulation needs. By June 2020, according to McKinsey Global, governments throughout the globe had contributed $10 trillion to alleviate the economic chaos caused by the global crisis.
Stocks, real estate, shares, and Bitcoin, all of which have a finite quantity, saw their value rise as fiat currency fell in value. The value of these assets rose consistently even when the world’s economy was in a crisis. During its historic price run, the decentralized digital currency Bitcoin gained more than 250%, thanks to the interest of traditional investors who viewed inflation as a possible threat and bought into the cryptocurrency.
What is Inflation?
Inflation is characterized by a broad decline in a currency’s purchasing power and an increase in the cost of living. Because of their restricted supply, cryptocurrencies like Bitcoin tend to have low inflation rates.
A general rising tendency in consumer prices over an extended period is the hallmark of an inflationary economy. This trend also tracks with the depreciation of the economy’s currency, which means that as long as inflation persists, a fixed amount of goods and services will cost a greater number of currency units.
Everything from electricity to cars to food to healthcare to housing is affected by inflation. Because inflation makes money less valuable, it impacts both individuals and businesses when it occurs frequently in an economy. To sum up, inflation lowers the buying power of consumers, diminishes the value of savings, and postpones retirement. To effectively respond, central banks worldwide keep a close eye on inflation. One example is the 2% inflation objective the United States Federal Reserves set. If inflation rates surpass the targeted level, the system modifies its monetary policy to counteract the problem.
Is Inflation Here to Stay?
Recently, inflation has been here to stay rather than a fad. According to financial markets, inflation rates are steadily rising across the board due in large part to the worldwide response to the pandemic.
Inflation may fall from its current highs at some point, but Yahoo claims it will remain for these three reasons:
- Disparities between the supply and demand for workers
- Real estate prices on the rise
- Prices for entry are anticipated to rise
Bitcoin and Inflation
Although the economics surrounding the Bitcoin market are complicated, many cryptocurrencies, like Bitcoin, are designed to either resist inflation or experience predictable and modest inflation rates. To add insult to injury, Bitcoin is widely regarded as a hedge against inflation, but in light of recent economic developments, it has been performing less well as a pure hedge.
What role does Bitcoin play in inflation?
The cryptocurrency’s alignment with overall market movements has been driven mostly by institutional investors. This suggests that Bitcoin’s value is expected to decline in tandem with the market. So, when inflation news hits, the Federal Reserve will probably enact a dual mandate. Monetary tightening and an increase in policy interest rates will result in a fall in the value of assets, including cryptocurrencies like Bitcoin.
Do cryptocurrencies experience inflation?
Even Bitcoin sometimes hailed as “inflation-resistant,” is subject to inflation, just like any other cryptocurrency. As more Bitcoin is mined, its value rises, just like gold. On the other hand, inflation rates will inevitably fall due to the 50% reduction in Bitcoin mining that occurs every four years.
In most cases, investors won’t be too concerned about Bitcoin’s regular yearly inflation rates so long as its value keeps going up against fiat currencies. On the other hand, the performance of other cryptocurrencies can vary. To illustrate the point, stablecoins are low-volatility cryptocurrencies tethered to fiat currency. However, stablecoins can also see their value decline due to inflation. Stablecoins depreciate in tandem with their reserve currency.
Is Bitcoin Deflationary or Inflationary?
Theoretically, Bitcoin is a money that causes inflation. This is because its main purpose was to imitate the steady inflation rate of gold. Conventional wisdom holds that Bitcoin is deflationary due to its rising purchasing power, but in reality, deflation is defined as a reduction in the money supply (or its equivalents).
Deflation is more than simply falling prices, despite the common misconception to the contrary. Such a price drop is the result of deflation, a monetary phenomenon. Thus, Bitcoin is not deflationary since its supply will remain constant. Conversely, the supply will rise gradually until it hits a fixed limit of 21 million coins.
Bitcoin will no longer exhibit inflationary or deflationary characteristics upon reaching this limit. Rather, it will follow its predetermined trajectory toward disinflation, which will lead to a static money supply and monetary base.
Is Bitcoin Inflation-proof?
Cryptocurrencies such as Bitcoin provide excellent alternatives to gold, which is traditionally seen as a haven from inflation. Bitcoin is more accurately described as an “inflation-resistant” asset rather than “inflation-proof,” implying total invulnerability to external changes. Many believe that Bitcoin, the biggest and most well-established cryptocurrency, can help protect their wealth against inflation. It could be even more effective as a hedge than gold. Bitcoin may be more prone to price swings than gold, but it hedges against inflation thanks to its superior long-term growth potential.
Limited supply
Because its supply is fixed, Bitcoin is an excellent inflation hedge. A fixed and limited supply of an asset means that fresh coins cannot enter circulation, eliminating the possibility of inflation.
Not tied to a specific economy or currency
For the same reason that gold does not belong to any one entity, economy, or currency, bitcoin does not. It is a class of assets that trades internationally and reflects demand on a global scale. When compared to equity markets, Bitcoin is more advantageous because it does not have to contend with the numerous economic and political dangers involved with stock markets.
Easily transferable
Bitcoin is a cryptocurrency similar to gold in that it is long-lasting, versatile, scarce, and secure. However, Bitcoin is more portable, decentralized, and transferable than gold, which gives it an advantage. Bitcoin is a decentralized cryptocurrency, which means that anybody can store it. This is in contrast to gold, which is a commodity controlled by sovereign states.
Why is Inflation Important for Crypto?
It is possible that high inflation rates for fiat money will lead to an increase in investments in digital currencies to alleviate concerns over the worth of their fiat currency as time passes. Investors who are looking to diversify their investment portfolios have a fantastic alternative in the form of cryptocurrencies such as Bitcoin (BTC) and Ether, which cost $3,386.
What will Happen to Bitcoin in a Recession?
The “Great Recession” of 2007–2008 was the crucible from which Bitcoin was born. The public needed decentralized money, and Satoshi Nakamoto created Bitcoin to meet this need in the wake of massive bank failure. The ultimate product was cryptocurrency, not tied to any government or central authority.
When one country’s economy struggles, it can have a domino effect on other countries that are economically interdependent. Bitcoin can be a recession-proof investment due to its intrinsic diversification. While the value of the US dollar fluctuates in response to factors like GDP, export prices, monetary policy, and currency demand, the value of Bitcoin is decentralized and so immune to fluctuations in any one country’s economy.
Also, the health of an economy is irrelevant to Bitcoin’s value. It’s a rare and safe asset that can be used in different countries. In the event of a recession, Bitcoin is anticipated to fare better than other cryptocurrencies, such as Ethereum, due to its principal function as a store of value.
