How is Bitcoin a Hedge against Inflation?

[TL;DR]
Over the years, Inflation has been a constant feature of all economies. It happens when governments create an excess supply of money causing the price of goods and services to rise accordingly. In such scenarios, the currency loses value which in turn causes investors to lose money.
Usually, in uncertain times, they move their wealth to mediums that are better able to resist inflation.

Traditionally, Gold, Real Estate, and Stocks are the preferred alternative when it comes to storing wealth. This is because they tend to increase in value or at least remain steady when the local currency gets devalued.

However, much recently, an alternative hedge against inflation has arisen in the form of digital money. Bitcoin specifically, is becoming appealing to investors since it seems to be more resistant to inflation than fiat money. In fact, it has been called digital Gold in some quarters because it functions like the yellow metal.

Created in 2009, the value of the cryptocurrency has risen from virtually nothing to well over $31,000 at writing. Within that same time frame, the US dollar has decreased in value by 34.8%. Evidently, Bitcoin’s increase in value is growing at a faster rate than the inflation of the dollar. This is true for many other currencies as well.

The virtual currency was built with qualities that have made investors consider it an alternative to traditional inflation hedges.

One such quality is scarcity. Satoshi Nakamoto’s invention was modelled after this quality of gold. From the very start, the digital currency’s algorithm was programmed to cap supply at 21 million tokens. Once that amount has been mined, no more bitcoins would come into existence. This makes it a scarce commodity with the potential to rise in value over time and act in a deflationary capacity.


Finally, Bitcoin is a decentralized commodity, unconnected to native currencies and government regulations. This quality separates the digital currency from all traditional hedging alternatives. While those are affected by government policies and regulations, BTC remains unaffected. Investors find its decentralized quality attractive even in a stable economy but during inflation, it is the cherry on the cake.

It enjoys the support of financial giants like Elon Musk, Michael Saylor and DBS Holdings CEO, Piyush Gupta.

In this article, we will examine how Bitcoin is a hedge against inflation, Read on for the scoop.

Keywords; Bitcoin, Store of Value, hedge against inflation, inflation, Satoshi Nakamoto, BTC, decentralized, digital currency.


What is Inflation?

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Before considering how Bitcoin can shield your investments from inflation, you must first thoroughly understand the concept of inflation. You would notice that the price of goods and services has changed over the years. For instance, the price of a gallon of milk in 1960 was $0.95, but by 2021, it had increased to $3.59. That is what inflation looks like. It is the devaluation of a nation’s currency over the years.

Inflation happens when a government prints excess money into circulation usually to implement policies. This causes such currency to lose value in comparison to goods and services. So a consumer may have more money today and be unable to purchase the same things he could two years ago. The last annual report for the year which ended in April 2022 places inflation at 8.3% according to the US Labor Department. Yet in 2021, Bitcoin grew at 59.8% considerably higher than that.
At the time of writing, Bitcoin has moved over 7900%, Gold 14.99%, and S&P500 97% over the past 10 years.



Traditional Means of Mitigating Inflation in the Past and Their Pros and Cons.

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Gold
The yellow precious metal is one of the most popularly accepted stores of value among investors. For thousands of years, investors have viewed gold as a holy grail for exchanging and holding wealth. Once the value of fiat money started to wobble, they transferred their assets to Gold where it remained relatively immune.

A case study of this is the Covid-19 pandemic when world economies went into recession. Between the end of 2019 and the middle of 2021, Gold experienced an upsurge of 38%. As many investors used it as a hedge against inflation. It is highly regulated, difficult to fake, and has multiple utilities.


However, gold as a store of value inherently has the following flaws:
- It lacks liquidity
- It is cumbersome to transport and store
- And its centralized nature makes it vulnerable to Government policies and regulations which can be constricting.

Real Estate.
Throughout the ages, land, and buildings have been considered valuable sources of storing wealth. It is scarce, durable, and appreciates with time.

Nonetheless, experience has proved that real estate may not always be a trustworthy hedge against inflation. In 2007, year-on-year sales of homes plummeted 13% according to National Association of Realtors data when the “Housing bubble” burst. It doesn't help that there are so many factors bogging down the determination of real estate pricing. Geographical location, Infrastructure, Government policies, and Economic and Political volatility all affect the value of real estate. These combined are enough to deter investors who aren't already experienced in this type of investment.

Stocks
Another popular way to hedge against inflation comes in the form of Long-term investment in Stocks. But this only pays if the company has fundamentals that can weather impatient investor pull-out setbacks.

However, the one thing all of these share in common is centralization, they are regulated in one way or another by central authorities. Government policies and prejudices have more control over these assets sometimes than the investors themselves. This could be a setback, limiting investors' freedom over their assets which is where Bitcoin comes in.


Why/How Bitcoin Can Favorably Compete with Traditional Investments as a Hedge Against Inflation.

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"There are a million ways to save your money but just one way to save your money. #Bitcoin"-Michael Saylor, CEO of MicroStrategy.

Naysayers typically cite Bitcoin's volatility as a reason why it doesn't count as a viable repository of wealth.

However, the idea behind Satoshi Nakamoto’s invention was exactly that: Investors would find in it a decentralized, Safe and limited store of value.

The 2020 economic meltdown of the Covid-19 pandemic provided the needed proof that said design is viable regardless of volatility. As the economy crumbled under the weight of the lockdown, BTC saw an upsurge of 147.8%. After dipping slightly at first, it rallied, leaving gold at 23.4% and Stocks at around 20% in the dust.


Moreover, recent studies show that more millennials prefer Bitcoins as a store of value above Gold. Below are the reasons why.

Scarcity
Only 21 million Bitcoins can ever be in existence. From the onset, this stipulation was programmed into the cryptocurrency’s algorithm. As of the end of 2021, 18.77 million bitcoins had already been mined. That's 83% of all the bitcoins that would exist ever.

The mining process already has preset limits to guard against inflation due to excessive supply. Hence, every 4 years a halving occurs. That means that the rate of mining would be reduced by half every 4 years. Consequently, the amount of Bitcoin that would be minted continues to reduce till it trickles out completely.

The cryptocurrency would increase in value as mining reduces and finally trails out. Since excess availability of fiat currency is what causes it to lose value, Bitcoin would hedge against the same thing by scarcity. Its 21 million supply cap makes it scarcer than Gold which is still being discovered.

Decentralization.
Bitcoin is not submitted to any central authority, even the founder has remained hidden under a pseudonym since its inception. Decision-making in the system falls to all coin holders giving them full control over what happens to their investments. Unlike traditional assets, BTC is immune to government regulations and policies, a unique store of value in its own right.

Safety.
Every Bitcoin transaction is entered on a public blockchain where it can not be altered, faked, or stolen. Blockchain technology makes it possible to trace tokens while also preventing fraudsters from duplicating or corrupting transactions made with BTC. Investors need not fear for the safety of their assets.


Liquidity and storage Advantage of Bitcoin.

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Unlike Gold which is cumbersome to transfer and store, Bitcoin is stored on the net and can be transferred with just a tap of a button. Furthermore, Bitcoin provides more liquidity as it is ever ready for transfers and other transactions since it is digital. Gold on the other hand is not so readily available, stored away in secure vaults merely serving as a store of value.


How about stablecoins?

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Stablecoins are another form of digital currencies, decentralized but pegged to fiat money. Although investors favour it when exiting positions in the digital market, it is not a viable store of wealth. This is because the same peg which provides stability also ties its destiny to its inflation-prone fiat counterpart. Whatever happens to traditional money happens to it, as such it cannot serve as the needed hedge during uncertain times.


In a nutshell.

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Bitcoin was created to serve as an alternative store of wealth for hedging against inflation. Its founder deployed a decentralized infrastructure and a limited supply cap to fulfil this goal.

Although the traditional stores of values have had years to earn investors’ trust, Bitcoin is coming alongside in acceptance. Early last year, Bitcoin prices spiked when the richest man in the world commented that he supports digital currency. The Bank of Singapore also mentioned that it might consider BTC as its store of value.
In time other individuals and establishments may yet share the same sentiments.






Author: Gate.io Observer: M. Olatunji
Disclaimer:
* This article represents only the views of the observers and does not constitute any investment suggestions.
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