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Bitcoin and Inflation


The Link Between Bitcoin and Inflation.

Bitcoin and Inflation

Some investors are said to be flocking to bitcoin to protect their wealth from the effects of runaway inflation. But what exactly does this mean?

Despite arguments to the contrary, cryptocurrency is generally considered an inflation-resistant asset, and its proponents often present it as an asset class unrelated to real-world assets. But things quickly get complicated when you learn that cryptocurrencies are unique and some of them are inflationary by design.

1) What is inflation?

Inflation is an economic term that refers to periods when prices rise over time. This is usually because a currency depreciates - when a unit of the same currency buys you less than before. If you watch a documentary from the '80s and you see someone selling a hamburger for 50 cents while the same joint charges you $10, that's inflation.

  • You may have noticed how quickly inflation rises when prices rise faster than your wages. If your $50,000 salary gets you 10% fewer goods and services than the previous year, you're in worse shape. But if your employer increases your salary to $55,000, you won't have to change your spending habits and you won't feel the effects of inflation.
  • Economists believe that a little inflation helps buy people and thus stimulates the economy. But in times of economic crisis, such as the coronavirus pandemic, inflation can spiral out of control.
  • Economists disagree on the reasons for the current rise in inflation (the worst in decades) in the United States, which measures about 8.5%. Some people point to the Federal Reserve for printing too much money used to stimulate the economy and manage the pandemic.
  • Others say the Fed is not entirely to blame - the shortage of supply caused by the lockdowns was the main problem.

2) Bitcoin and inflation

Crypto advocates believe that allowing central bankers to influence the economy through monetary policies, namely quantitative easing, is disastrous. The massive printing of money by the central banks of Venezuela, Turkey, and Zimbabwe has devastated their respective economies.

  • Crypto advocates say that cryptocurrencies like bitcoin (BTC) often resist the ineptitude of central bankers and governments because they are decentralized and cannot be shut down.
  • Another reason is that the minting of bitcoins is determined by a code - unlike the Fed, a central bank cannot print as many bitcoins as it wants.
  • As more bitcoins come into circulation over time, the rate at which new bitcoins are issued to miners is determined by the bitcoin protocol. The supply has been limited and the supply of new coins is expected to end around the year 2140. And unlike central banks, whose economists have to react to market events, the Bitcoin blockchain works like clockwork.
  • Approximately every four years, the protocol halves the issuance of new bitcoins – a phenomenon known as “halving”.
  • Bitcoin's stable supply has caused some fans to think of it as "digital gold", referring to the yellow metal, another inflation-proof asset. So-called stores of value assets stand the test of time as they are unrelated to other assets and are resistant to market interfering assets. But are cryptocurrencies like bitcoin really an inflation hedge?

Why Bitcoin Is An Inflation-Resistant Asset?

As the US dollar fell, bitcoin rose well above its value, rewarding early investors. But cryptocurrency is highly volatile: Talk to recent investors who lost money when Bitcoin crashed, and they might tell you that their investments haven't surpassed short-term inflation.

Over the past few years, bitcoin has followed the U.S. stock market, which performs well when the economy is buoyant and spending is stagnant, such as during times of high inflation. As inflation hit 40-year highs in December 2021, bitcoin crashed. It's hard to say without looking back whether Bitcoin is a long-term inflation hedge.
However, not all cryptocurrencies work like bitcoin. Some cryptocurrencies are deflationary – meaning the supply decreases over time, designed to increase the value of the coin over time (if demand stays the same).

Other cryptocurrencies have dynamic resources; The TerraUSD (UST) stable coin shoots and destroys LUNA coin exchange-based tokens to keep its price stable at $1.
And some tokens, such as non-tradable tokens (NFTs), are one-of-a-kind – like a piece of art, their value depends on how unique they are.