Bitcoin ( BTC) is frequently touted as a hedge against rising inflation based on the belief that fiat currency is likely to decrease in value because of central bank printing. However, Bitcoin has a fixed supply of 21 million coins. The upper limit is capped and allows Bitcoin an advantage over inflation. But what is Bitcoin inflation-proof?
The COVID-19 pandemic led to several countries print more money in order to meet incentives to their citizens, driving the value of currency down. McKinsey Global reported that governments around the world had given 10 trillion dollars by the end of June 2020 in order to alleviate the destruction to the economy caused by the global economic crisis.
The value of fiat currency fell, the worth of assets that had an insufficient supply, such as real estate, stocks shares, and Bitcoin was able to increase. Despite widespread unemployment and political tensions across the world, the price of these commodities increased gradually. Bitcoin was a popular choice for traditional traders who believed in its potential for a way to protect against the rising cost of inflation and triggered a record price surge that saw the digital currency increase by over 250 percent.
What is the definition of inflation?
Inflation is typically characterized by the value of currencies declining in time, and an increase in the cost of goods and services for consumers. Due to their insufficient availability, cryptocurrencies such as Bitcoin typically have lower inflation rates.
Inflation is typically defined as a continuous rising trend in the cost of services and goods that an individual or business. It is also a sign of the currency’s purchasing power. This means that it requires ever more units of currency in order to buy the same quantity of goods and services, as inflation continues.
Inflation impacts any service or product which includes automobiles, utilities food, medical services, and housing. The rate of inflation that is prevalent in the market affects both customers and companies as it makes money less useful. In other words, inflation decreases the consumer’s purchasing power as well as reduces savings’ value and can delay retirement. Central banks throughout the world are monitoring inflation so that they are able to respond quickly. For instance, the U.S. Federal Reserve, for instance has set a target of 2% for inflation. If inflation rates increase beyond the desired level then the system alters its monetary policy to fight the rising rate of inflation.
Do you think inflation is here to stay?
Inflation has been more constant rather than a temporary phenomenon in recent times. Much of it is due to the worldwide responses to the pandemic the financial markets are witnessing an increasing rise in the rates of inflation around the world.
While the high rate of inflation could continue to decline, Yahoo argues that inflation will be going to remain due to the three reasons listed below:
- Demand and supply imbalances in the labour market
- Rising prices in real estate
- Prices for entry are anticipated to increase in the coming months.
Does inflation make a difference? for the economy?
Inflation decreases a currency’s buying power. This means that inflation is harmful? Not necessarily. Many economists are of the opinion that inflation levels moderate could benefit the economy. What is the reason?
A moderate inflation rate drives consumer spending. This is vital for the growth of any economy and is the reason it is why the US Federal Reserves targets a 2.2% inflation rate as a way to maintain prices.
In a healthy economy moderate and steady inflation rates can be anticipated. Economic growth is defined by a rise in spending on products and services by businesses and consumers, and a demand that is greater than supply. When demand exceeds supply, producers hike prices, causing inflation. In this sense inflation is as a positive thing.
But, any increase or decrease in price that is too frequent fast is usually not a good indicator. An increase in price that is rapid causes consumers to anticipate more price increases in the future. The consumers may resort to stockpiling or buying more goods and services in anticipation of increased prices to come in the near future. This drives demand upwards, causing producers to increase their prices. This is usually called “hyperinflation” or “runaway inflation.”
The opposite of Deflation, however is characterised by a constant decline in prices. As a result consumers delay their purchases, hoping to find lower prices to come. While demand continues to climb downwards, manufacturers are also cutting prices to lure buyers.
This is why the moderate level of inflation generally is beneficial for the economy because it boosts spending and economic growth.
Bitcoin and inflation
While the economics surrounding the Bitcoin market are complex Certain cryptocurrencies, such as Bitcoin are created to combat inflation or to experience regular and low rates of inflation. In addition, while Bitcoin is often hailed as an effective security against inflation but recent economic trends have witnessed Bitcoin being less effective as a hedge.
What is the role that Bitcoin contribute to the rise of the process of inflation?
In large part, driven by investments from institutions The cryptocurrency is more and more correlated with market fluctuations. That means that if the market falls, Bitcoin likely goes down also.
Therefore, when inflation news hits in the coming months, it is likely that the Federal Reserve will likely enact the dual mandate. Interest rates for policy will move upwards as well as tightening in the monetary system. This means that the value of assets (including cryptocurrency such as Bitcoin) will experience declines in value.
Do cryptocurrencies experience inflation?
Yes, cryptocurrencies experience inflation — even Bitcoin, which is often seen as “inflation-resistant.” Much like gold, Bitcoin experiences inflation as more of it is mined. However, considering that the cost of mining for the creation of Bitcoin is automatically cut by 50 percent every four years the rate of inflation is also expected to fall eventually.
In the event that Bitcoin’s value increases when compared to currencies that are fiat, Bitcoin’s normal annual inflation rates don’t tend to be an issue for investors. Different cryptocurrencies, however might behave differently.
Stablecoins such as are tied to fiat currency and are considered a cryptocurrency with low volatility to save money. However, they are susceptible to inflation and can decrease in value over time. When their reserve currency loses value, so does the stablecoins.
Is Bitcoin an inflationary or deflationary asset?
Bitcoin actually is an inflationary currency. It was created to replicate the steady gold’s inflation rate. Although the standard definition of deflation could mean it, Bitcoin is deflationary since its purchasing power grows in time, deflation refers to a decline in the quantity of money (or alternatives to it).
To clarify to be clear, deflation is not only an increase in price however it is often identified as the case. The phenomenon of deflation is one that triggers a price reduction. Bitcoin, therefore, can’t be considered to be deflationary as its supply won’t decrease. It will increase steadily until it reaches a limit that is 21 million dollars. (This is predicted to happen sometime around 2140.)
Once this limit is attained, Bitcoin will be neither deflationary or inflationary. It will instead be inflationary, just like it was designed to be -resulting in a monetary base that is constant and an indefinite supply.
Are you sure? Bitcoin inflation evidence?
The issue is “Is Bitcoin a good hedge against inflation?” While gold has been for a long time the best insurance for inflationary pressures, cryptocurrency such as Bitcoin are also great options.
Rather than “inflation-proof,” which suggests complete impenetrability against any outside changes, Bitcoin can be considered as more of an “inflation-resistant” asset. Being the biggest, most well-established cryptocurrency, Bitcoin is usually regarded as an excellent inflation hedge. It could even be thought of as an even better option than gold.
Even though Bitcoin is more unstable as gold is, however it provides greater long-term growth prospects and, consequently, safeguards against inflation. What is the reason?
Supply is limited
The fixed supply of Bitcoin makes it an ideal hedge against inflation. If the supply of an asset is set and limited this means that new coins are not able to enter circulation and thus eliminate the possibility of inflation.
Not tied to any specific currency or an economy
Bitcoin as gold isn’t a one particular entity, economy or currency. It is an asset class that is international that represents the demand across the globe. Bitcoin can be a more beneficial choice over stocks since it doesn’t have to face the numerous risk factors that are associated with the economy and politics with stock market.
It is easily transferable
Similar to the gold that we have, Bitcoin can be durable and readily interchangeable, scarce and safe. Bitcoin has an advantage over gold because it is more mobile and decentralized, as well as transferable. Because it is decentralized that anyone can store Bitcoin in comparison to gold, which is an established supply by sovereign states.
What is the significance of inflation for cryptocurrency?
Inflation rates that are high for fiat currency could cause more investment in digital currencies in order to alleviate concerns about their fiat decreasing value over the course of time. Cryptocurrencies such as BTC as well as Ether ( ETH) provide a excellent alternative for investors who wish diversify their investment portfolios.
Benefits of Bitcoin’s supply-based system
One of the key factors in making an asset invulnerable to inflation is the scarcity. Since Bitcoin has a finite supply and is therefore scarce, it will remain so and thus ensuring its value will be stable in time. This is the reason it’s called “digital gold.”
The person who invented Bitcoin, Satoshi Nakamoto wanted each piece of Bitcoin to increase in value over time. This was made possible by its limitless supply and also the slow pace of how new Bitcoin is mined.
Once the maximum amount of Bitcoin is reached, there will be no new Bitcoin is able to be generated. Transactions will continue to be conducted like normal and miners will be compensated however, only for processing costs.
What happens to Bitcoin during a downturn?
Bitcoin was created out of the aftermath of the financial crisis in 2007-2008 which is which is also known by the name of “Great Recession.” In reaction to the widespread failure of banks, Satoshi Nakamoto built Bitcoin to provide people with an alternative currency that didn’t require the involvement of central authorities or third parties. This created a cryptocurrency that was independent of any organization or sovereign nation.
When there is a recession, negative economic impacts can be felt across countries that have economic connections. Because Bitcoin is also a diversified asset which makes it an asset that is resistant to recession. In contrast, there is a tendency to believe that the U.S. dollar is subject to the limitations and benefits associated with the U.S. economy — including GDP, export prices the monetary policy and demand for currency -it is also diversified. Bitcoin isn’t confined to single country’s gain or loss.
Additionally, Bitcoin has value regardless the way an economy is doing. This is due to the fact that Bitcoin is a highly sought-after and secure asset. It’s also transferable across the globe. Bitcoin’s primary goal is to be an asset store This is why it’s predicted to outperform other cryptocurrency, such as Ethereum in the event of an economic downturn hits.
What is the best way Bitcoin can benefit customers in the long term
Bitcoin is unlikely to surpass the major centralized currencies, however it has transformed the world of finance since its launch on the market in 2009. The technology behind it has enabled breakthroughs in financial services that are decentralized (DeFi) and is advantageous to customers who are not banked in a wide range of and economically disadvantaged regions.
Blockchain technology has helped pave the way for many advancements but its main function is to provide users with a reliable service. In its fundamentals, blockchain technology gives users an unsecure, secure, and decentralized means to perform financial transactions. Bitcoin along with other cryptocurrency assets, acts as a recession-proof and inflation-proof alternative to fiat.