Looking at the current economic scenario, we know that inflation has been on the rise for quite some time now. Due to this trend, people are gravitating toward things that will protect their assets and investments from the effects of inflation.
Bitcoin (bitcoin to INR), and cryptocurrency in general, is often seen as an inflation-resistant asset, and proponents frequently portray it as an asset class uncorrelated with real-world assets. However, things soon grow difficult when you realize that each cryptocurrency is distinct, and some are designed to be inflationary. So it’s better to do your research before you stake your capital.
Understanding What Inflation Is
Inflation is a phrase used in economics to describe times when prices of commodities tend to grow with time. That’s usually because a currency devalues, or when one unit of the same currency buys less than it used to. If you watch an ’80s documentary and see someone selling a burger for 50 cents but the same restaurant costs you ten dollars, that’s inflation in action.
Economists have always believed that a little amount of inflation is beneficial in keeping consumers purchasing and therefore fueling the economy. However, in times of economic catastrophes, such as the coronavirus pandemic, inflation has the potential to completely spiral out of control.
Relation Between Bitcoin And Inflation
Crypto supporters believe that enabling central bankers to control the economy via monetary policies, namely quantitative easing, would eventually result in negative results. Examples of these are the central banks of Venezuela, Turkey, and Zimbabwe which have wrecked their own economies by rampant money creation.
Crypto proponents often claim that since cryptocurrencies like bitcoin (BTC) are decentralized and cannot be shut down, they are immune to the ineptitude of central bankers and governments.
Another reason is that the issue of bitcoin is controlled by a code — unlike the Fed, a central bank cannot just print as much bitcoin as it wishes to influence the market. It is completely out of the hands of the central bank which works in its favor.
While more bitcoin will enter circulation over time, the Bitcoin protocol determines the pace at which new bitcoin are distributed to miners and not any external factor. The supply is limited, and fresh coin supplies are expected to run out by the year 2140. And, unlike central banks, whose economists must react to market developments, the Bitcoin blockchain operates like a well-oiled machine, unaffected by the outside world. Having said that, bitcoin has its own ups and downs as it’s a volatile cryptocurrency.
Every four years, the system reduces the production of new bitcoin by half – a process known as “halving.” Because of Bitcoin’s limited quantity, some supporters compare it to “digital gold,” a reference to the yellow metal, another popular inflation-resistant commodity. Stores of value assets withstand the test of time because they are uncorrelated with other assets and are immune to market interference.
But Is Bitcoin Really A Hedge Against Inflation?
While the US dollar has declined in value, since bitcoin’s inception the cryptocurrency has only seen an increase in its value, seeing tribulations from time to time, rewarding early investors. However, cryptocurrency is very volatile: recent investors who lost money when bitcoin crashed may inform you that their investment did not surpass inflation in the near run.
Bitcoin has mirrored the U.S. stock market in recent years, which performs well when the economy is stimulated and wobbles when spending falls — as in times of high inflation. Bitcoin plummeted after inflation hit 40-year highs in December 2021. Without the benefit of hindsight, it is impossible to assess if bitcoin is a long-term inflation hedge.
However, not all cryptocurrencies function in the same way as bitcoin. Some cryptocurrencies are deflationary, which means that the supply declines over time in order to raise the coin’s value over time (if the demand remains the same).
Other cryptocurrencies have volatile supply; for example, the stable coin TerraUSD (UST) mints and destroys tokens based on LUNA token exchanges to maintain its price stable at $1.
Although the cryptocurrency market is volatile, you can always buy polygon, Ethereum, dogecoin, etc, to make some profits as they are doing well. Wherever you decide to put your money, always do research first.