Why and how does bitcoin always beat inflation?
The world continues to move forward from the pandemic, which means restrictions are more relaxed and the economy is slowly recovering. However, consumer demand for essential goods and services is on the rise, causing inflation. U.S. consumer prices in October increased to 6.2% from last year, which is the sharpest jump since December 1990. Prices for energy, vehicles, and shelter are the ones leading the gains.
Inflation has numerous contributing factors aside from an increase in consumer demand. Rising wages, increasing money supply, and certain policies are also other causes.
Main causes of today’s inflation
The causes of the current inflation vary from country to country. For the U.S., one of the main reasons inflation is rising this year is that the Federal Reserve swamped the economy with dollars to control inflation.
As reported by Forbes, in April 2021, the M2 money supply was at $20.11 trillion, a 30% increase from January last year. When a country has too much money supply in circulation within its system, the currency value will decrease.
During the pandemic, many manufacturing plants closed down or downsized their operations, which halted or slowed down the production of goods. Throughout this time, the market exhausted its stockpiles. Now that everything is going back to normal, manufacturers are trying to match consumer demands. Because of the increased demand, some industries hiked their prices.
The combination of the pull of consumer demand, limited supply of goods, and dollar expansion will naturally lead the economy to inflation.
Good inflation and hyperinflation
Inflation isn’t always bad. There are times when inflation is a good sign. Sometimes, it can occur because of strong economic growth and low unemployment rates that close the gap between supply and demand, promoting investment and more economic growth. However, while inflation can seem agreeable at times, good inflation can lead to hyperinflation.
Hyperinflation is the rapid and out-of-control increase in an economy. The two main causes of hyperinflation are demand-pull and money supply. It can worsen poverty, raise uncertainty, ruin people’s trust in institutions, and break down the social order. Several countries are currently in a period of hyperinflation, and the list includes Venezuela, Zimbabwe, Sudan, Argentina, and South Sudan.
Bitcoin as an inflation hedge
An inflation hedge is an investment tool that can help protect the value of your assets against inflation. Some business investors are buying Bitcoin as an inflation hedge, and they even compare it to gold. In the 1980s, gold was the most popular inflation hedge in the US. Amid mass unemployment, gold slid currency value in the economy.
Under similar circumstances in the post-pandemic world, many people consider Bitcoin today’s inflation hedge. Why is that?
A central bank regulates fiat currency, and it can be produced at large when the economy is unstable, like what the Federal Reserve has recently done. On the other hand, as a system based on blockchain, cryptocurrency is decentralized, making it an ideal store of value and hedge against inflation.
Because of their decentralized nature, cryptos aren’t prone to the economic factors that lead to inflation, such as the oversupply of currency. Blockchain technology allows miners to mine only a finite supply. With Bitcoin, it’s supposed to have only 21 million units.
When at a certain point the limit is reached, it’s expected that the demand for Bitcoin will be higher than its circulating number. Crypto enthusiasts believe that investors will turn to Bitcoin when conventional financial systems become vulnerable.
More than a hedge against inflation
Bitcoin doesn’t only serve as a hedge against inflation, as it can also hedge against the negative consequences that come with inflation. It’s also a hedge for police states that want to take private wealth, volatile governments that close bank accounts, broken payment systems, political instability, and social disruption.
Bitcoin success amidst inflation
Bitcoin has withstood the chaos of the pandemic. When the coronavirus was declared as a global pandemic, this crypto was valued at around $5,000. In the last 52 weeks, it has increased by 317%. Additionally, analysts predict that Bitcoin will be priced at approximately $58,000 at the start of January 2022.
Over a similar period, the U.S. inflation rates have also been ascending. Around March 2021, the inflation rate started at 2.62%, and by June, it was 5.39% and 6.22% in October. While inflation climbs, Bitcoin has been growing and responding well.
Bitcoin vs. gold
As mentioned earlier, Bitcoin has been compared to gold as to which kind of inflation hedge is better. In October, Bitcoin was up 87%, while gold was down 7.3%. Investors seem to be gravitating towards Bitcoin nowadays. According to a report by JPMorgan Chase analysts, “Institutional investors appear to be returning to Bitcoin, perhaps seeing it as a better inflation hedge than gold.”
The U.S.’s biggest bank adds, “The reemergence of inflation concerns among investors has renewed interest in the usage of Bitcoin as an inflation hedge.” They even note that the crypto has the potential to hit $146,000 in the long term if its volatility lessens and more institutions prefer it over gold as an addition to their portfolios.
Bitcoin’s volatility is its biggest drawback against gold, and its instability is around four to five times higher than gold, according to JPMorgan. Be that as it may, global markets strategists still believe in crypto’s potential saying that “digital assets have emerged as a clear winner post the pandemic.”
Invest in 21st century’s gold
Inflation is one of the major concerns of investors, as the value of money depreciates during this time. Having a good hedge against inflation can protect your assets from economic instability. An excellent inflation hedge increases its value over time, and Bitcoin has proved this over the past year.
While gold is another inflation hedge many people invest in, Bitcoin is the future. Gold had its time in the 20th century, and Bitcoin is now a strong contender in becoming the gold of the 21st century. When the right time comes, it has the potential to hit a high price. It’s something you’d want to be involved with early on rather than being too late in the game.