Given the inflation in a Fiat-based economy, experts and even ordinary people are looking for an investment or tool that works as a hedge. Gold, stocks, and real estate have long haunted investors who are ever afraid of losing value due to inflation. It would be fair to say that this commodity always had its limitations as a hedge.
However, Bullion, or commodities such as gold and silver, become less credible on the small investment horizon. In 2021, Bullion was steadily losing its place. Real estate has small liquidity and bigger transaction values and requires ongoing management/maintenance. As for stocks, they need investors to have sophisticated financial skills. Most regular people do not have enough skills to be an effective stock managers. Inflation is when the purchasing power of the local currency falls. A popular metric used to measure inflation is the consumer price index.
Inflation means an increase in the prices of goods and services, which leads to a decrease in the purchasing power of the local currency. As a result, more money is necessary to buy a particular item. For example, a few years ago, the price of a fruit basket was $5.00. Now, the cost of the same basket is $8.00. This, in turn, indicates a decline in purchasing power.
CPI metrics affect interest rates, pensions, salaries, government/tax breaks, contracts, and other payments. Because cash loses purchasing power over time, saving cash leads to the fact that people lose savings. This forced people to invest their money to keep valuable investments, such as gold, stocks, real estate, and crypto. Will Bitcoin Protect Against Inflation?
Bitcoin and Inflation
For an asset to be of value, an investment must be able to maintain its purchasing power over time. More precisely, it should increase in value or at least remain stable. The key features of such assets are affordability, scarcity, and durability.
Gold had a heterogeneous experience in past inflationary periods. There was a time in the 1980s when keeping gold gave owners negative returns. Spread data shows how the gold spot had a record in past inflation periods. Commodities expect to rise when consumer prices increase. During periods of high inflation, especially in the 1980s, there was a time when gold owners were receiving negative returns.
Recently, gold gradually lost the brilliance of hedging. People are less interested in gold during a pandemic and even when the waves subside. This is still good enough to maintain value in the long run; however, the metal is less reliable in the short run.
The rise of the U.S. housing bubble highlighted that real estate may not always be as reliable as a hedge against inflation. Real estate was an effective hedge against inflation. However, this myth was dispelled in the U.S. In 2007, home sales and prices in the country fell sharply. According to data from the National Association of Realtors, sales fell 13%. In America and worldwide, real estate prices depend on the economy, government policy, geographical location and infrastructure, and more.
Some actions help to protect the value of the investment. Even if these stocks hit impatient investors in the short term, they will recover well over time. However, it is worth noting that not all stocks work well for hedging inflation. It is necessary to find companies with solid fundamental foundations; Consequently, they are more likely to receive better dividends for their shareholders. The central government controls traditional assets classes, making them vulnerable to pressure.
The value proposition of all ordinary assets is inextricably linked to central government policies. Bitcoin is a powerful hedge contra inflation thanks to limited supply/decentralization. These factors bring endurance and deficit. However, can Bitcoin prevent inflation? The two main factors to consider are decentralization and limited supply.
Bitcoin supply was algorithmically limited to 21 million coins. By 2021, 18.77 million BTC had been put into circulation. 83% of the bitcoin that could exist was mined 12 years after the cryptocurrency was founded.
Inflation occurs when the state or central bank continues to over-print currency notes, leading to an oversupply of money. According to economic theory, inflation appears when the money supply grows faster than the actual output of goods or services. This is because households have more cash to buy the same amount of goods, resulting in higher prices.
Pre-established limits on Bitcoin in circulation mean the absence of excess supply and the maintenance of inflation control. Moreover, the annual rate of digital coin mining falls by 50% once every four years.
With thousands of nodes operating worldwide, the network is optimally resilient to external attacks that may alter its monetary policy, which could endanger the congenital shortage of digital currency. As for the level of decentralization, no other money is closer to Bitcoin. BTC is immune to not being a leader who can influence or hire an executive committee. The digital currency remains a unique digital asset with a super-successful experience without influential leaders.
When businesses with Bitcoin interests tried to resize the block to allow more transactions per block, individual node operators and developers categorically opposed the proposal. This underscored the inherent resilience of Bitcoin. Economically strong entities could not establish their will in the network. Since its inception, the value stored in Bitcoin has grown faster than inflation. Investors view Bitcoin as an instrument of defeating inflation. However, the goals of individual investors may be different.
According to statistics, Bitcoin worked perfectly against inflation; Digital currency is much better than real estate, gold, and stocks. However, other factors such as the regulatory environment must consider. The uniqueness of Bitcoin lies in the fact that it is limited and decentralized. Consequently, as an asset, it can sustain inflation.