If you've heard people talk about the benefit of Bitcoin, you've probably heard about inflation. Crypto enthusiasts and evangelists say crypto helps investors hedge their wealth against inflation; the crypto market is the best defense.
But since inflation is more of a term used in traditional finance, you might be wondering how it applies to crypto. Let's take a look at the dynamics of inflation and Bitcoin.
Inflation isn't a new concept in finance. The term describes a currency's loss of value over time. Prices of goods increase, and it costs more to buy something than it did, say, a year ago.
Many countries can see double-digit levels of inflation in a year. But for some countries, inflation creates stronger currencies.
Take the United States, for example. The demand for the dollar doesn't just come from the country. Other countries want the dollar as well. They believe it's the world's reserve currency, so the government can afford to print more money than people need.
Inflation isn't all that bad. In fact, some economists argue that keeping inflation levels between 2 percent and 4 percent (anything less than 5 percent) can be beneficial for an economy. This is another reason the US government can afford to print more money.
How Most Economies Fight Inflation
When inflation reaches dangerous levels, a currency loses value - usually against the dollar. When this happens, people start seeking ways to protect their wealth.
For people in most inflation-hit countries, the best way is simple. Convert your savings to dollars and keep it in the bank. This way, when your currency loses value, you gain because your money is in dollars and not the local currency.
But ever since cryptocurrencies went mainstream, they've been touted as possible hedges against inflation. Especially Bitcoin, since its value has increased significantly over the past few years. From being virtually worthless in the 2010s, Bitcoin's value has surged to over $30,000 today.
Due to market volatility, Bitcoin's price continues to fluctuate. But the general trajectory tends to be upwards.
Bitcoin's Interesting Makeup
One of the reasons Bitcoin is a good hedge against inflation is its design.
By nature, Bitcoin has a deflationary build. The asset has a hard cap of 21 million. After the 21 millionth Bitcoin is mined, there's no more. With the coins' limited supply, there's no room for manipulation. The mining process is also designed to ensure that Bitcoin's total supply tapers off over time.
Scarcity is a critical factor when considering an asset as a hedge and store of value. There are already over 19 million Bitcoins mined. A new block of transactions is added to the Bitcoin blockchain every 10 minutes. So every 10 minutes, 6.25 BTC is added to the current pool.
This structure is resistant to any form of change and makes Bitcoin scarcity much higher than most alternative assets.
Why Inflation Matters for Bitcoin
Today, many countries are fighting rising inflation levels, and people are watching their savings accounts lose value. Many are moving into crypto.
Various Bitcoin features help to fight inflation.
For one, Bitcoin's makeup ensures freedom from manipulation. The government can't decide to mine more Bitcoin just to achieve policy objectives. Central banks can't burn Bitcoin or mine more of it.
Like other alternative assets (including oil and gold), the general belief is that Bitcoin should experience a price jump in uncertain periods. Investors also love Bitcoin because it is easier to move - unlike gold and oil, which carry their own costs. Owners can move money to and from Bitcoin whenever they like, a convenience that comes in handy at crunch time.
And Bitcoin has continued to rise over time. Investors who play the long game understand Bitcoin's long-term potential. They have no problem investing in it - especially when the traditional market starts to dive.
Lastly, there's the availability issue. Fighting inflation with the dollar might not work for most developing economies since the government can easily restrict access. Banks can limit how many dollars a person can access, making it almost impossible for citizens to protect their wealth.
Bitcoin is readily available and offers the opportunity to keep money in a dollar-denominated asset. In the fight against inflation, this is critical.