Bitcoin is often said to be a hedge against inflation, because of the assumption that sooner or later, fiat money will decrease in value. As we know, Bitcoin has a fixed supply of 21 million coins, which definitely helps against inflation.
What is inflation?
First, let’s see what exactly inflation is. Simply said, it is characterized by currencies losing value and an uptick in the value of goods. During inflation, currencies lose their purchasing power. It can affect any product or service, including food, medical supplies, housing, etc. Therefore, inflation reduces the purchasing power of consumers.
Due to the limited supply of cryptocurrencies like Bitcoin, they experience lower inflation rates.
How long does inflation last?
We can say that today's inflation is a response to the Covid pandemic, and financial markets are seeing a rise in inflation rates. While it is possible for inflation rates to subside, there is also a possibility that it is here to stay, because of the following reasons:
Rising prices in real estate;
Entry prices are expected to move up;
Supply and demand imbalances in the labor market;
Bitcoin and inflation
There are some cryptocurrencies, and Bitcoin is one of them, designed to resist inflation or at least experience low inflation rates. Anyway, recent economic developments have seen Bitcoin performing less as a pure hedge. Driven by institutional investments, Bitcoin become increasingly aligned with the market movements, meaning that the cryptocurrency goes down with the market.
Does Bitcoin experience inflation?
Cryptocurrencies, including Bitcoin, can experience inflation, although it is often seen as inflation resistant. Similar to gold, Bitcoin can experience inflation when more of it is mined. As we know, the mining of Bitcoin is reduced by 50% every four years, so inflation rates are also decreasing.
Is Bitcoin deflationary or inflationary?
Technically, Bitcoin is an inflationary currency, as it was created to mimic the stable inflation rate of gold.
Deflation is seen as a decrease in prices, but it is not just that. It is a monetary phenomenon, causing this price decrease. Therefore, Bitcoin can not be deflationary, as its supply will not decrease. As we already said, it will increase until it reaches 21 million coins. And when this happens, it will no longer be seen as inflationary or deflationary. It will become disinflationary.
Is it inflation proof?
So, the question is, “Is Bitcoin a hedge against inflation?”. As we know, gold has been seen as a hedge against inflation, but today there are many cryptocurrencies that also provide great alternatives
Actually, Bitcoin can be considered as an inflation-resistant asset, and because it is the largest cryptocurrency, it is said to be a good inflation hedge.
Bitcoin is more volatile than gold, but it offers great long-term growth prospects, as well as protection against inflation. Here are some reasons for that:
Limited supply makes Bitcoin a good inflation hedge.
Bitcoin is not tied to the economy or currency, and doesn’t have to deal with economic or political risks.
Bitcoin is easily transferable
Why is inflation important for cryptocurrencies?
Truth is, increasing inflation rates can lead to more investment opportunities in digital currencies. Cryptocurrencies like Bitcoin or Ethereum are able to provide an alternative for investors who want to diversify their portfolio.
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