In 2009, Satoshi Nakamoto introduced the world’s largest cryptocurrency after the 2008 financial crisis. In their whitepaper, the anonymous group or individual criticized the centralized control of the money supply by governments and central banks as the primary cause of the crisis. Several financial experts, scholars, and investors have also echoed similar sentiments.
Thus, Bitcoin creators’ primary goal was to provide an alternative transaction currency free from government control. Bitcoin is an electronic, decentralized currency, meaning it doesn’t have a central authority. That means it is not subject to political or institutional influences that could manipulate its supply and usage in an economy.
Higher inflation distorts monetary value while low inflation slows economic growth. Nevertheless, inflation is a significant risk that could harm investors. The growing inflation rates have prompted many investors to diversify their assets and acquire wealth in cryptocurrencies that can hold substantial value over time.
Bitcoin’s Role during Inflation
Gold has historically remained the best hedge against inflation, but its prominence has decreased as investors lean towards crypto. People have increasingly described Bitcoin as a better inflation hedge than traditional assets. However, many people do not know why and how Bitcoin mitigates inflation. Here’s how Bitcoin can help hedge against inflation.
Bitcoin is a deflationary asset. Therefore, many people from countries with unstable fiat currencies increasingly use it as a store of value to protect themselves against the rising costs of goods and services and hyperinflation. Governments and central banks can manipulate fiat currencies by altering interest rates and printing too much money for personal gains.
However, Bitcoin is manipulation proof because it does not have a central authority, and its supply is limited. Bitcoin runs on a decentralized or distributed blockchain network, comprising thousands of random nodes worldwide. Unlike fiat money transactions that involve intermediaries, the Bitcoin network links only the two parties to a transaction, without third parties.
Its underlying blockchain verifies and validates transactions on an encrypted ledger, accessible to all users on the network. The validated data is irreversible, and even users cannot alter it. The absence of restrictions and third parties in Bitcoin transactions makes Bitcoin less susceptible to political and institutional influences that could disrupt asset prices.
Bitcoin’s supply is restricted to 21 million tokens only, and miners have already created about 90% of the available tokens. Its supply is also subject to halving, reducing the miners’ rewards by half every four years, making it scarcer. However, its demand grows daily as mainstream institutions worldwide invest in and support it.
Volatility
While Bitcoin offers a better inflation hedge than precious metals and other traditional assets, it is also highly volatile. However, critics argue Bitcoin and other cryptocurrencies’ prices generally appreciate over time, as seen in their past performance. For example, Bitcoin suffered a massive decline from an all-time high to about $30,000 in July 2021, but it still reported a 2% growth. Its annual gain in the following month surged to about 300%.
Many investors flocked back to gold when Bitcoin experienced a drastic drop of 45% in May, citing the crypto market’s immaturity as the main reason underpinning the stability of asset prices. Every asset that serves as a store of value and an inflation hedge demands high-level trust and strength. Those are qualities that Bitcoin has plenty of; hence, its more significant potential to hedge inflation better than conventional assets.
Bitcoin is a decentralized transaction currency and investment asset, recognized and accepted worldwide. While it is subject to sharp and enormous price swings, Bitcoin offers the best way for investors to protect their wealth from inflation.
