As inflation rises across the developed world and is above the range that central banks are comfortable with (6%+ actual compared to around 2-3% per year) and billions of people are suffering the erosion of their hard-earned savings. Bitcoin’s ability to hedge inflation has never been more relevant. We will examine whether bitcoin can beat inflation.
it is pro-cyclical to institutional investments and has a short-term inverse relationship with inflation increases—not that it can beat inflation in the short term as a hedge.
The first important point to note here is that the price of bitcoin has considerable investment interest associated with it, particularly from institutional investors and several major players including the sovereign buyer (El Salvador). This means that bitcoin is correlated with the major stock indices, with some movements on more “bitcoin-specific” news, such as the recent collapse of FTX. This is because the current interest in bitcoin contains a large speculative element.
Bitcoin currently has a short-term inverse correlation with inflation news, as inflation news brings the idea that central banks will further increase interest rate targeting. If inflation increases, the price of bitcoin will tend to decrease. Conversely, if inflation is “slowing” – such as a positive reading of the US consumer price index – then asset prices will rise, including bitcoin – given that the Federal Reserve and other central banks are slowing interest rate targeting.
2- Bitcoin’s anti-inflation is subtle and the next big event is the halving
The Bitcoin money supply is much thinner than people lending the network. By algorithmically determining the supply of bitcoin (and allowing only 21 million to be created), bitcoin follows a markedly different path than monetary policy implemented by sovereign governments and serves as a clear counterexample to losing monetary policy.
Because sovereign governments that control their currencies have the ability to inflate the money supply, this is what happens in large developed economies. Building a digital store of value with a diminishing money supply and scarcity on the network allows for deflation—measured over a long enough time scale that bitcoin has managed to create and maintain remarkable value.
Bitcoin has gone through three halvings: at first, you could buy a bitcoin for around $10. After the second, you can buy it for around $500 USD – even though the price of the third halving is consistently lower than the current price trend, despite the wild spikes and crashes in bitcoin’s price from year to year.
It is during halving periods that bitcoin’s most prominent monetary control mechanism exists. Every 210,000 mined blocks causes the block reward for miners to decrease – a halving to be exact. Currently, the block reward for mining one bitcoin block is 6.25 bitcoins, and in the next halving, it will be 3.125 bitcoins. Bitcoin has a long way to go to become a completely scarce asset by the late 2030s. With this algorithmic money supply and clear limits on the issuance of new bitcoins, bitcoin is well-suited to combat the inflationary tendencies created by the loose money supply in the long run.
3- Separate the speculative element with the underlying network activity and scarcity
It is important to consider speculation and price action separate from the underlying network activity and scarcity generated by the Bitcoin network.
One of the points of contention about the digital money supply is the ability to sprout multiple cryptocurrencies, each representing a concept of digital value, from owning digital art to controlling tokens in a company’s future.
However, throughout the ICO frenzy, we’ve seen bitcoin stall and stay strong – bitcoin’s dominance of the markets has shifted, but the bottom has never gone – and many tokens that previously competed for attention and mining have slowly died by the wayside. . By 2019, in fact, about half or more of the ICO tokens were effectively dead.
On the contrary, activity and use in bitcoin has found a very favorable path. As an example, even though the nodes on the Lightning Network have been affected a bit recently, the fact is that while ICOs are dying left and right, the bitcoin protocol was able to implement major changes that allow for “Layer-2”. a solution that promises fast/low transaction fees worldwide for bitcoin holders. The number of active nodes on the Lightning Network has increased from approximately 2,000 in January 2019 to approximately 17,000 in December 2022. The net worth of the network increased from about $2 million to $85 million.
As the United States and most advanced economies (especially Europe) suffer from inflation-related problems, from rising energy prices to supply chain problems affecting popular goods, the idea of inflation has finally entered the “Western” media sphere. Although the reduction of interest rate targeting to zero or negative levels after the 2008 financial crisis was seen as deflating inflation, this was not entirely true.
Now that inflation has become rarer in countries that are not linked as currency “baskets” (such as Turkey, Argentina or Venezuela), this issue comes up more often. Bitcoin is a good long-term hedge against money-based inflation, which can be lost during price action rises and falls, even if short-term, when you open it.