Does Bitcoin Protect From Inflation?
Why Should We Protect Against Inflation?
How effective is Bitcoin against inflation? Let's first understand what inflation is and how other things are useful to bring it down.
With inflation in fiat-based economies, experts and even ordinary people seek a haven as an investment or hedging purpose. Gold, stocks, and real estate have long been a haven for investors who fear losing value against inflation.
However, commodities like gold and silver have become less reliable on small investment horizons. In 2021, bullion has steadily depreciated, Real estate has low liquidity and higher transaction costs and requires ongoing management and costs. About stocks, investors need to have advanced financial skills, and most ordinary people lack the necessary skills to be productive stock investors.
What is Inflation?
What is inflation? Inflation is the period when the purchasing power of the local currency falls. The popular metric used to measure inflation is the Consumer Price Index (CPI).
Inflation refers to rising prices of goods and services, which leads to a decrease in the purchasing power of the local currency. As a result, more currency is required to purchase a particular item. For example, a fruit basket sold for $5 a few years ago, but now the same basket carries a price tag of $8, indicating a decrease in purchasing power.
The Consumer Price Index (CPI) is a popular metric used to measure inflation by exploring the weighted average of price baskets of various goods and services. The CPI metric affects interest rates, wages, subsidies, tax breaks, pensions, and other payments.
Ways to Avoid Inflation
What are the ways to avoid inflation? Investing in valuable investment vehicles such as gold, real estate, stocks, and cryptocurrencies helps curb inflation.
Because cash loses its purchasing power over time, holding cash causes people to lose their savings. This encourages people to invest their money in valuable investments like gold, real estate, stocks, and now crypto. Does Bitcoin protect against inflation? The only question in mind for a long time.
To be held as an investment, an asset must be able to maintain its purchasing power over time. In other words, its value should increase or at least remain constant. The main characteristics associated with such assets are scarcity, accessibility, and durability.
Gold as a Measure Against Inflation
In times of past inflation, gold has had a mixed history. The 1980s were times when holding gold brought negative returns to its holders.
Morningstar data takes a look at how gold's track record has been during past inflation periods. A commodity that should protect against inflation is expected to rise as consumer prices rise. During periods of high inflation, especially in the 1980s, there were times when gold holders achieved negative returns.
Gold has been getting less attention lately. It's still seen as good enough to get value in the long run. However, in the short term, the metal is now seen as less reliable.
Real Estate as an Inflation Hedging Tool
The bursting of the US housing bubble underlined that real estate cannot always be reliable as a hedge against inflation.
Real estate has long been seen as an effective hedge against inflation. However, this myth was destroyed by the bursting of the housing bubble in the USA. In March 2007, home sales and prices in the country fell sharply. Prices had fallen 13% that year.
Real estate prices in America and around the world are closely linked to factors such as government policy, the country's political and economic stability, local demographics and economy, geographic location, and infrastructure, among others. The parameters are too many for a normal person to understand.
Stocks as a Measure Against Inflation
Long-term investment in stocks can protect you from the effects of inflation. Just make sure the company has strong foundations.
Some stocks help protect the value of your investment. Although these stocks are hit by impatient investors in the short term, they will recover over time. However, keep in mind that not all stocks can protect against inflation. You need to find companies that have strong fundamentals and are more likely to pay better dividends to their shareholders.
Is Bitcoin a Good Inflation Hedge Tool?
Bitcoin is an effective hedge against inflation, thanks to its limited supply and decentralization.
Does Bitcoin protect against inflation? The two main factors to consider are limited supply and decentralization.
Bitcoin (BTC) supply is algorithmically capped at 21 million coins. By the end of 2021, 18.77 million BTC had been in circulation. In other words, 83% of the Bitcoin that could emerge was mined within 12 years.
Inflation happens when the government or the central bank continues to print banknotes exorbitantly, causing an excess money supply. Economic theory suggests that inflation occurs when the money supply increases faster than the actual output of goods or services. This happens because households now have more money to buy the same amount of goods, causing prices to rise.
Predetermined limits for circulating Bitcoin mean there is no oversupply and keep inflation in check. Also, the annual mining rate of the digital coin drops by 50% roughly every four years. Given the current supply rate, Bitcoin's annual production rate will continue to decline, making it more valuable than gold and increasing its value.
The decentralized nature of Bitcoin takes it out of the control of a central authority. With thousands of nodes operating worldwide, the network is optimally resilient to external attacks that attempt to change monetary policy and that could endanger the scarcity inherent in the digital coin. When it comes to decentralization levels, no other currency can even come close to Bitcoin.
It happens through coercion, coercion, or bribery in any authority or organization. However, Bitcoin is immune to such factors as it has no leader to impress and no executive committee to bribe. Its founder, Satoshi Nakamoto, has remained a pseudonym since Bitcoin was born. Bitcoin remains a unique digital asset to have a super successful track record in the absence of effective leadership.
How Does Rising Inflation Affect Bitcoin?
Since its inception, the value stored in Bitcoin has increased faster than inflation itself.
Investors see Bitcoin as a tool to beat inflation, but individual investors may have other purposes, such as making a profit, growing their wealth, or using it as a store of value. As the rise in Bitcoin prices reveals, the value stored in the cryptocurrency has increased faster than the inflation itself. Even in 2021, a modest year for Bitcoin, the cryptocurrency grew by 59.8%, significantly better than inflation in most countries.
Does Bitcoin Protect From Inflation?
Does Bitcoin protect against inflation? Statistics reveal that Bitcoin works much better against inflation than assets like gold, real estate, and stocks.
As an asset, Bitcoin works incredibly well against inflation. But you need to be wary of foreign factors such as the regulatory environment. Statistics show that investing in Bitcoin has much better rates than gold, real estate, stocks, and other assets.
Fundamental forces such as limited supply and decentralization put Bitcoin in a unique position as an asset that can keep inflation at bay.