in the Times of international economic crisis, governments print money. This leads to inflation and the investors later You keep your investment capital in long-term stable investments. Historically it was gold, but in the current economic crisis Gold was joined by another long-term store of value: Bitcoin (BTC).
There are many good reasons for this. The US Federal Reserve is dealing with the crisis in a terrible wayand it reacted to rising unemployment in the same way as always: print money. The dollar has already lost 5% of its value And the predictions say this is just the beginning According to Goldman analysts, the coin is expected to lose up to 20% in the coming years.
Along with this devaluation has come Another threat to investors: deflation. Since the value of dollar assets is rapidly falling (and the worst is believed), Investors see Bitcoin as a hedge against deflation. This seems to be the main reason why Bitcoin has held its value despite the unfortunate news in other parts of the economy.
But are these investors right? Can cryptocurrency serve as a hedge against dollar inflation? Let’s check it out.
Inflation and deflation
For crypto investors who are used to dealing with the daily – or even hourly – movements of the market, it can sometimes be easy to forget the macro-level trends that drive our economy. Inflation is one of them, and it is helpful to define the term broadly before delving specifically into cryptocurrency’s role in combating it.
In essence (and as you will remember from Economics 101), Inflation usually occurs due to a general decline in the purchasing power of fiat money. Many things can cause this loss of purchasing power: foreign investors leaving a certain currency or even investors attacking a currency. However, Most inflation is the result of an increase in the money supplyFor example, when the Federal Reserve unilaterally creates billions of dollars and sends checks to millions of Americans, for example.
Deflation is the opposite. In deflationary scenarios, prices fall as the fiat currency appreciates in relation to the various goods and services. Again, there can be various causes, but usually occurs due to tightly controlled fiscal policy or technological innovation.
The global pandemic and inflation
The key point in these definitions is as follows Inflation can only occur in fiat currenciesThese are the ones that are not based on the market value of an item of property, plant and equipment, but largely on confidence in the growth of gross domestic product. Since the Bretton Woods Agreement of 1944, the latter has been the basis for the value of the US dollar.
A fiat currency gives governments a fair amount of freedom to print money and supposedly control inflation.. However, when trust in the government is low (as it is now) Government spending programs can cause inflation to spiral quickly out of control. Gold boomed in the 1970s because investors viewed it as a hedge against rapid dollar inflation.
This is similar to what is happening now. The global COVID-19 pandemic has led to massively inflationary monetary policy and an aggressive expansion of the money supplyWhile prices in certain key areas such as staple foods continue to rise due to fluctuations in supply due to quarantines in different countries.
In this environment, it is not surprising that gold is booming. At least only There is a limited supply of gold on earth and therefore its price cannot easily be influenced by government policy. However, some cryptocurrencies are also booming, apparently for the same reason. Billionaire investors therefore compare Bitcoin and gold.
Bitcoin: a deflationary asset?
The reason some forms of Cryptocurrency can act as a measure against inflation It’s exactly the same reason gold can: There is a limited supply. This is often forgotten by many, including those in the crypto room, but so many cryptocurrencies are worth remembering – and most importantly Bitcoin– – were built with an inherent limit.
The 21 million bitcoin limit means that the demand for bitcoin at any given point should be greater than the supply, which means that In terms of value, the price per unit should increase as supply decreases. In addition, the fact that Bitcoin allows investors to limit their exposure to government surveillance networks means that During this period of low confidence in the government, many people are shifting their investments away from the US dollar and into cryptocurrency to avoid inflation. and government nonsense. In other words, the comparison with gold investments from previous crises seems pretty accurate.
But here’s the thing: It’s not entirely clear that Bitcoin is actually a deflationary asset. Or at least not yet. While it is technically correct that the supply of currency is limited, we are nowhere near that limit as most estimates are around last bitcoin mined around 2140. In practice this means the following: Bitcoin will not be able to offer a fully stable hedge against inflation for at least another 120 years.
Flexibility and stability
Of course, that may not be that important. One of the main driving forces behind the Bitcoin boom was the combination of (relative) stability and (relative) variability.. In this context, it is encouraging that investors are now viewing cryptocurrency as a stable hedge against an inflated US dollar, but viewing crypto as a mere replacement for gold would be a misunderstanding: Cryptocurrency is much more than just a hedge.
This article does not contain any investment recommendations or recommendations. Every trading and investment step is associated with risks. Readers should do their own research in making their decision.
The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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