There’s a growing belief that bitcoin can be an inflation hedge despite its extreme volatility in the past few months. For example, when prices of goods and services go pretty up, bitcoin is supposed to go higher, creating room to protect the wealth of investors. This is because investors are always on the lookout for ways their assets could outgrow the rise of inflation in society, thereby keeping them on top of the financial system game. But the extreme volatility of cryptocurrencies, in general, these days is beginning to cast doubt in the minds of investors, seeing that many countries are currently experiencing a steep rise in inflation. In this article, we will make a case for bitcoin as an inflation hedge.
Inflation and its effects
Surprisingly, most countries are still striving to get out of the pandemic-induced recession the COVID year brought to our economic shores. Though many are still optimistic, believing the hikes in prices are just transitory. Whether transitory or not, the consequences of the inflationary whiplash on the wealth of investors are unthinkable. This further explains why saving without investing will erode the purchasing power of the money you’ve stacked in the bank over time. Plus, Israel seems to be taking the biggest pummeling so far in the world followed closely by Italy.
What makes Bitcoin a unique asset class?
First off, only 21 million bitcoins will continue to be in existence or circulation. Will this be a limitation? Short answer, no. This is because bitcoin can be divided into bits (there are 1,000,000 bits in 1 bitcoin) and traded. And no, nobody can buy all the existing bitcoins because only a fraction of them is in the exchange market. Therefore, even if you’re determined to buy all of them, you’ve got to wait till they are all issued in the next decades.
Furthermore, bitcoin is unique (a ruleless system with no ruler or rules) and is known for maintaining its value over the years despite its extreme volatility.
Why Bitcoin is an Inflation Hedge
There’s a current bearish sentiment toward bitcoin because of its recent fall in value. Added to this is the war in Ukraine, which is taking a toll on economic stability worldwide. With inflation on the rise, investing in cryptocurrency is still considered a risky adventure.
First of all, why bitcoin will be a successful inflation hedge is because of its decentralization and fixed supply of 21 million BTC.
Because bitcoin is decentralized, it is not within the control of anyone or any organization. And this makes it immune to monetary policies or coercion. Remember, plus, there’s nobody to bribe because it has no leader or executive committee.
This unique feature in itself further makes it resistant to any external attack.
Because bitcoin has a fixed supply, this will create a high demand for it, inadvertently leading to an increased price. How? Let’s explain. First of all, inflation is a result of the skyrocketing cost of goods and services. The resultant effect is the state, or central bank will keep printing currency notes to counter this rise. On the other hand, there can be no excess supply of BTC since it’s fixed (as is the case with money).
In addition, other currencies of the world can be subjected to what is known as “quantitative easing” (policies that make existing assets shed their value). However, there are several crypto pundits and financial analysts who don’t share in this thought, citing the collapse of Terra stablecoin.
History is on Bitcoin’s side
In the past, bitcoin has worked well, more than other inflationary hedges such as gold, stock, and real estate, beating them by no small margin. Statistics reveal that storing bitcoins has proven to be a better measure against inflation except for this insanely bearish year. The bottom line is bitcoin will rise again as it has always done.
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