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Inflation is rising around the world. Bitcoin (BTC) is often positioned as a hedge against inflation, suggesting that fiat money will eventually fall in value due to the central bank’s printing of money. In contrast, Bitcoin has a fixed supply of 21 million coins. A limited upper limit gives Bitcoin an advantage over inflation. But is Bitcoin protected from inflation?
The COVID-19 pandemic has led many countries to print more money to meet the stimulus needs of their citizens, which has led to a decline in the cost of money. McKinsey Global reported that by June 2020, governments around the world had committed $10 trillion to mitigate the economic chaos caused by the global crisis.
As the value of paper money fell, the value of limited-supply assets such as stocks, real estate, stocks, and Bitcoins rose. Despite mass unemployment and economic unrest around the world, the prices of these assets rose steadily. Bitcoin attracted traditional investors who saw the cryptocurrency’s potential as a hedge against inflation, leading to a historic price jump that saw the decentralized digital currency grow. more than 500%.
What is inflation?
Inflation is usually characterized by currency depreciation over time and rising prices for consumer goods. Due to the limited supply, cryptocurrencies such as Bitcoin usually have a low inflation rate.
Inflation is usually defined as a steady upward trend in the prices of goods and services in an economy. It also corresponds to the fact that the currency of the economy loses purchasing power – this means that as inflation continues, more and more units of currency are required to buy a certain amount of goods and services.
Inflation affects any product or service, including utilities, cars, food, medical care, and housing. The prevalence of inflation in the economy affects individual consumers and businesses because it actually makes money less valuable. In short, inflation reduces the purchasing power of consumers, makes savings less valuable, and delays retirement. Central banks around the world monitor inflation to be able to respond effectively to it. The U.S. Federal Reserve, for example, has set an inflation target of 2%. If the inflation rate exceeds the target, the system adjusts its monetary policy accordingly to combat inflation.
Inflation is with us for a long time?
Recently, inflation has been more of a constant than a transient phenomenon. Largely due to the global response to the pandemic, financial markets have seen a steady rise in inflation rates around the world.
Although high inflation may decline over time, there are perceptions that inflation will persist for the following three reasons:
- Imbalance of supply and demand in the labor market
- Rising real estate prices
- Entry prices to markets that are also expected to rise
Is inflation good or bad for the economy?
Inflation reduces the purchasing power of a currency. Does this mean that inflation is bad? Not necessarily. Most economists believe that a moderate level of inflation can benefit the economy.
A moderate level of inflation stimulates consumer spending. This is crucial to the growth of any economy, and that’s why the U.S. Federal Reserve is targeting an inflation rate of 2% in an attempt to stabilize prices.
In a healthy economy, stable and moderate inflation rates should be expected. Economic growth is characterized by an increase in spending on goods and services by consumers and enterprises, as well as an excess of demand over supply. Because demand exceeds supply, producers raise prices, causing inflation. In this context, inflation can be considered a boon.
However, any price increase or fall that occurs too much and too quickly is usually not a good sign. The rapid rise in prices is leading consumers to expect further growth in the future. Consumers can then resort to hoarding or buying more goods and services in anticipation of higher prices in the future. This behavior contributes to a further increase in demand, which, in turn, pushes producers to raise prices. This phenomenon is commonly referred to as “hyperinflation” or “rampant inflation.”
Deflation, on the other hand, xcharacterized by a consistent fall in prices. When this happens, consumers put off their purchases in anticipation of lower prices in the future. As demand continues to decline, manufacturers also continue to lower prices to attract buyers.
For these reasons, moderate inflation is generally good for the economy because it stimulates spending and supports economic growth.
Reasons why moderate inflation is generally good for the economy
- Consumers buy more goods, so manufacturers have to produce more goods, for this they hire more workers.
- Demand for labor reduces unemployment and raises wages.
- Workers who earn more income begin to consume more.
Bitcoin and Inflation
Although the economy of the Bitcoin market is complex, some cryptocurrencies, including Bitcoin, are designed to withstand inflation or experience predictable and low rates of inflation. And while Bitcoin is generally touted as a hedge against inflation, recent economic events have shown that Bitcoin doesn’t work as a pure hedge.
What role does Bitcoin play in inflation?
Cryptocurrency, largely driven by institutional investment, is increasingly aligned with general market movements. This means that when the market falls, Bitcoin also falls.
Consequently, when rising inflation became apparent to all, the Federal Reserve made two major decisions. Interest rates began to rise, and monetary policy began to tighten. As a result, assets (including cryptocurrencies such as Bitcoin) began to fall in value.
Do cryptocurrencies experience inflation?
Yes, cryptocurrencies are subject to inflation – even Bitcoin, which is often considered “resistant to inflation.” Like gold, Bitcoin experiences inflation as it is mined more and more. However, given that the reward for mining new Bitcoins is automatically reduced by 50% every four years, the inflation rate should also eventually decrease.
As long as the value of Bitcoin continues to rise relative to fiat currencies, Bitcoin’s typical annual inflation rate usually does not cause serious concern among investors. However, other cryptocurrencies may behave differently.
Stablecoins, for example, are pegged to fiat money and can be considered a cryptocurrency with low volatility to save money. However, stablecoins are also subject to inflation and can depreciate over time. As their reserved currency loses value, the same thing happens with stablecoins.
Is Bitcoin deflationary or inflationary?
Bitcoin is technically an inflationary currency. That’s because it was designed to mimic gold’s stable inflation rate. While a general definition of deflation can mean that Bitcoin is deflationary as its purchasing power increases over time, deflation refers to a decrease in the money supply (or its substitutes).
To be clear, deflation is not just a reduction in prices, although in common parlance it is defined as such. Deflation is a monetary phenomenon that causes such a decline in prices. Thus, Bitcoin cannot be deflationary because its supply will not decrease. Instead, its supply will steadily increase until it reaches a hard limit of 21 million coins. It is assumed that this will happen sometime in 2140.
When this limit is reached, Bitcoin will be neither inflationary nor deflationary. Instead, it will become disinflationary, as it has been programmed to do, culminating in a constant monetary base and an unchanging supply.
Is Bitcoin a hedge against inflation?
Many people have question“Is Bitcoin a good hedge against inflation?” Although gold has long been considered a hedge against inflation, cryptocurrencies like Bitcoin also provide excellent alternatives.
Instead of being “protected from inflation,” which implies complete impermeability to any external changes, Bitcoin can be seen as a more “inflation-resistant” asset. As the largest and most well-known cryptocurrency, Bitcoin is generally considered a good hedge against inflation. It can even be considered a better hedge than gold.
Although Bitcoin is more volatile than gold, it offers better long-term growth prospects and therefore protects against inflation. The main characteristics of Bitcoin make it resistant to inflation:
Limited Availability
Bitcoin’s Fixed Supply Makes It Good Protection from inflIt’s a good thing. When the supply of an asset is fixed and limited, it means that new coins cannot get into circulation, which eliminates the risk of inflation.
Not tied to a specific economy or currency
Bitcoin, like gold, does not belong to any one unit, economy or currency. It is an international asset class that reflects global demand. Bitcoin is a better option than stocks because it doesn’t have to deal with many of the economic and political risks associated with stock markets.
Easy to transfer
Like gold, Bitcoin is durable, easily interchangeable, scarce, and secure. Bitcoin has an advantage over gold, given that it is more portable, decentralized, and transferable. Because of its decentralized nature, anyone can store Bitcoins, compared to gold, whose holdings in sovereign countries are controlled.
Why is inflation important for cryptocurrency?
High inflation rates for fiat money could lead to increased investment in digital currencies, amid concerns that fiat money will lose value over time. Cryptocurrencies such as BTC and Ethereum (ETH) represent a great alternative for investors who want to diversify their investment portfolios.
Benefits of a Fixed Bitcoin Offer
One of the keys to making an asset resistant to inflation is a deficit. Since Bitcoin has a limited supply, it remains scarce, thereby ensuring that its value will remain unchanged over time, which is why it is called “digital gold”.
The creator of Bitcoin, Satoshi Nakamoto, wanted every unit of Bitcoin to rise in price over time. This was ensured by the limited maximum supply, as well as the slow speed at which the new Bitcoin is mined.
When the maximum number of Bitcoins is reached, new Bitcoins will no longer be created. Transactions will be executed as usual, and miners will still receive a reward, but only in the form of a processing fee.
What will happen to Bitcoin during the recession?
Bitcoin appeared after the financial crisis of 2007-2008, also known as the “Great Recession”. In response to the massive bankruptcy of banks, Satoshi Nakamoto created Bitcoin to provide the population with a currency that did not need third parties or central authorities. The result was a cryptocurrency independent of any organization or sovereign state.
During a recession, adverse economic consequences can extend to countries with economic ties. Since Bitcoin is also inherently diversified, it can serve as a recession-resistant asset. While the U.S. dollar depends on the advantages and limitations of the U.S. economy, such as GDP, export prices, monetary policy, and demand for the currency, Bitcoin is not limited to the losses or gains of any one country.
In addition, Bitcoin has value regardless of how the economy works. This is because it is a scarce and safe asset. It can also be transmitted around the world. Bitcoin’s primary goal is to store value, and that’s why it’s expected to perform better than other cryptocurrencies like Ethereum when a recession hits.
How Bitcoin Can Help Customers in the Long Term
Bitcoin is unlikely to dethrone major centralized currencies, but since its inception in 2009, it has changed the financial landscape. Its technology has contributed to revolutionary advances in decentralized finance (DeFi) and is beneficial to customers around the world.
Blockchain technology has paved the way for numerous advances, but its primary function is to serve users faithfully. At its core, blockchain technology provides users with a secure, permission-free and decentralized way to conduct financial transactions. Bitcoin, along with other crypto assets, serves as an inflation- and recession-resistant alternative to fiat.
Author: Elvir, Analyst at Freedman Club Crypto News
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