When the purchasing power of fiat currency declines and inflation rises, it is likely that experts and ordinary citizens alike are on the lookout for a tool or an investment that will be able to protect against inflation. Can BTC be used to hedge inflation or not? On the other hand, those who are worried about the depreciation of their money due to inflation, have long been protected by real estate, gold, and stocks. Furthermore, BTC’s reputation for inflation as a security, which was believed by Bitcoin blockchain nodes, is now being tested.
Understanding Hedge Against Inflation
Inflation refers to an increase in the prices of services and goods. And when the possibility of inflation comes to the fore, the possibility of a decrease in the purchasing power of the public increases. As a result, there may be a higher need for fiat currency to purchase services or goods that you may have purchased for less money in the past. For instance, an ice cream that sold for Rs 20 two years ago is currently selling for Rs 30, a situation that has been caused by inflation. However, in an economy, there can be various micro and macro reasons for inflation. Moreover, most specialists concur that supported expansion is probably going to happen when the fast expansion in the stockpile of government issued currency available for use doesn’t match the country’s monetary development. In general, the central banks of many countries also take the responsibility of controlling the possibility of inflation. When seen in circulation, it can monitor the supply of fiat currency and at the same time plays an important role in maintaining the credit limit of the national economy.
How is BTC able to act as a hedge against inflation?
Seen as a hedge against inflation, bitcoin is a currency that is believed to be the primary factor in the limited supply of coins. When the world’s largest crypto was created by Satoshi Nakamoto, he embedded a hard cap within the source code of BTC that limited circulation to around 21 million BTC. Now out of those 21 million BTC, there are around 19 million coins that have been generated, and only 2 million are yet to be minted. The source code of BTC cannot be changed by anyone to raise the supply. In this way, a new blockchain is created. Therefore, without excess supply, all the coins that exist may eventually become scarce, increasing demand, and, in turn, the asset’s price is likely to rise. Furthermore, unlike gold, BTC is completely portable when viewed. It takes only a few moments to transfer it from one corner of the world to another. Smartphone users can also use this method.
Is bitcoin a perfect hedge against inflation or not?
Though theoretically, BTC should serve as a great hedge against inflation. However, this is fungible, which means you can exchange one BTC for another without any value loss. It can be done in an accessible way, it has proved to be widely accepted as well as praised. However, several factors have led to extreme volatility in its price. Just as the popularity of BTC returned to normal at the end of 2018, after a significant rise in popularity in late 2017, and so on, it saw an all-time high during the year 2021 before falling again the very next year. At present, another problem with BTC is the number of regulations faced by lawmakers around the world. Meaning, in general, the property is valued by governments and institutions. And at the same time, strict regulations against BTC could hinder the adoption of the asset, which could potentially result in a significant drop in prices.