The relationship between Bitcoin and inflation

The speculation is that some investors have turned to bitcoin in order to protect their holdings from the effects of hyperinflation. But what exactly does that mean?

People are attracted to anything they can do to protect themselves from inflation, which has reached unprecedented heights.

Bitcoin assets are assumed to be inflation resistant, despite evidence to the contrary. However, things quickly get fuzzy if you find out that every cryptocurrency is unique and some are inflationary by design.

The idea that fiat money will eventually lose value as a result of central banks printing money is the rationale behind the frequent marketing of Bitcoin (BTC) as an inflation hedge .

The sudden fall in the price of Bitcoin causes cryptocurrency investors to speculate on a number of factors, such as inflation, which leads to losses in their Bitcoin wallet (exodus dot com/bitcoin-wallet). However, there is a fixed quantity of 21 million coins for Bitcoin. Since Bitcoin has a limited upper limit, it has an inflation advantage. But does Bitcoin have no impact on inflation?

Inflation: what is it?

The general characteristics of inflation include a rise in the cost of consumer goods and a gradual decline in the value of currencies. Cryptocurrencies like Bitcoin often have low inflation rates due to their tight supply.

The typical definition of inflation is a persistent upward trend in the cost of goods and services in an economy. Moreover, this coincides with the loss of purchasing power of the economy's currency, which means that as inflation increases, a certain amount of goods and services require an increasing number of monetary units. to be purchased.

Every good or service is impacted by inflation, including utilities, cars, food, healthcare, and housing. Since inflation essentially devalues ​​currency, it impacts both businesses and individual customers.

In other words, inflation reduces consumer purchasing power, depreciates savings and delays retirement. Global central banks monitor inflation so they can respond appropriately.

For example, the US Federal Reserve has set a target inflation rate of 2%. To fight inflation, should inflation rates rise above the desired level and should the system change its monetary policy?

Is inflation a constant problem?

Recently, inflation has become an enduring event rather than a fleeting one. Financial markets are witnessing a gradual increase in inflation rates globally, which is mainly due to the international response to the outbreak.

Yahoo argues that inflation is here to stay for the following three reasons, notwithstanding the possibility that high inflation rates will eventually decline:

– Uneven labor market supply and demand– Rising housing costs– Entry prices are also expected to rise

Bitcoin and price rise

Even though the economics of the Bitcoin market is complicated, some cryptocurrencies are designed to be inflation resistant or have low and predictable inflation rates. Additionally, although Bitcoin is frequently hailed as an inflation hedge, recent shifts in the economy have seen Bitcoin's performance as a pure downside hedge.

What role does bitcoin play in rising prices?

Cryptocurrency has increasingly followed market trends thanks in large part to institutional investors. This implies that Bitcoin will likely decline with the market when it does.

Therefore, the Federal Reserve will likely implement a dual mandate when inflationary news emerges. There will be a rise in key interest rates and a tightening of the financial system. As a result, the value of assets will decrease, including cryptocurrencies like Bitcoin.

Is Bitcoin Inflation Proof?

So the question is: is Bitcoin a decent hedge against inflation? Although gold is traditionally considered the best hedge against inflation, cryptocurrencies like Bitcoin can offer great options.

Bitcoin can be considered an “inflation-proof” asset as opposed to “inflation-proof,” suggesting complete impenetrability against any external change. In general, Bitcoin is considered an excellent hedge against inflation since it is the largest and most well-known cryptocurrency. It can even be considered a more effective hedge than gold.

Bitcoin has greater long-term growth potential and therefore protects against inflation, although it is more volatile than gold. How so?

Low availability of Bitcoin

Bitcoin is a strong hedge against inflation due to its f...