Cryptocurrency: Is Bitcoin really a good idea to protect against galloping inflation?

When inflation reaches new heights, people are attracted to everything they can rush into to protect inflation.

Despite arguments to the contrary, cryptocurrency is often considered an inflation-resistant asset, and proponents often present it as an asset class that is not correlated with real-world assets. But things quickly get complicated when you learn that cryptocurrencies are unique and some are inflationary by design.

What is inflation?

Inflation is an economic term that refers to periods when prices rise over time. Often this is because a currency devalues ​​- when a unit in the same currency buys fewer things for you than before. If you watch an 80s documentary and see someone sell a hamburger for 50 cents while the same joint charges you $ 10, it’s inflation in action.

You may have realized the pinch of inflation when prices rise faster than your wages. You are worse off if your $ 50,000 paycheck buys you 10% fewer goods and services than the year before. But if your employer raises your salary to $ 55,000, you do not need to change your spending habits and you will not feel the effects of inflation.

Economists believe that a little inflation is useful to get people to buy and thereby stimulate the economy. But in times of economic crisis, like the coronavirus pandemic, inflation can get out of control.

Economists disagree on the reasons for the current rise in inflation – the worst in decades – which measures around 8.5% in the US. Some people point the finger at the Federal Reserve for printing too much money, which in turn has been used to stimulate the economy and control the pandemic.

Others say the Fed is not entirely to blame – supply shortages caused by the shutdowns were the main problem.

Crypto-supporters believe that allowing central bankers to influence the economy through monetary policies, namely quantitative easing, leads to disaster. Massive bank transfers from the central banks of Venezuela, Turkey and Zimbabwe have ruined their respective economies.

Crypto-advocates often say that cryptocurrencies like bitcoin (BTC) resist the incompetence of central banks and governments because they are decentralized and cannot be closed.

Another reason is that the issuance of bitcoins is determined by a code – unlike the Fed, a central bank can not mint as many bitcoins as it wants.

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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 is limited and the supply of new coins is expected to run dry around the year 2140. And unlike central banks, whose economists have to react to market events, the Bitcoin blockchain is running like clockwork.

Every four years or so, the protocol halves the issuance of new bitcoins – the phenomenon known as “halving”.

Bitcoin’s fixed supply has led some fans to consider it “digital gold” – a reference to the yellow metal, another beloved inflation-resistant asset. So-called stocks of value assets can withstand time because they are uncorrelated with other assets and are resistant to entities that interfere with the market. But are cryptocurrencies like bitcoin really an inflation hedge?

The argument that Bitcoin is an inflation-resistant asset

As the U.S. dollar fell, bitcoin rose far above its value, rewarding early investors. But cryptocurrency is very volatile: Talk to recent investors who lost money when bitcoin crashed, and they might tell you that their investment did not exceed short-term inflation.

Over the past few years, bitcoin has been following the US stock market, which is doing well when the economy is booming and stagnating when spending is falling, as in times of high inflation. When inflation hit 40-year highs in December 2021, bitcoin fell. Whether bitcoin is a long-term inflation hedge without the benefit of hindsight is hard to answer.

However, not all cryptocurrencies work like bitcoin. Some cryptocurrencies are deflationary – meaning that supply decreases over time, designed to increase the value of the currency over time (if demand remains the same).

And some tokens, like non-fungible tokens (NFTs), are unique – just like a work of art, their value depends on how unique they are.

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