Bitcoin and Inflation: Understanding the Relationship

Inflation is a common phenomenon in economies, characterized by a general increase in the price of goods and services over time. It results from an increase in the supply of money relative to the demand for goods and services, leading to a decrease in the purchasing power of money. Recently with the implementation of monetary policies like quantitative easing, inflation has become a serious problem with no end in sight. Because of this, it takes a toll on the average family and their finances. In decades past, people turned to assets such as gold to prevent the dwindling of their savings, but in recent years, a new option has started to gain traction. Let’s take a look at past inflation hedges and why bitcoin may be a modern alternative.

Gold

Gold is considered an inflation hedge by many investors and economists due to its tendency to maintain or even increase in value over time. As inflation causes the purchasing power of money to decrease, the price of gold often rises, preserving its value. The 1970s serve as an example, where the gold value rose dramatically from $35 to $850, while interest rates climbed from 5.84% to 13.58%.

Bitcoin

Bitcoin and gold share some similarities in that they are both alternative investments and are considered a “store of value.” Both are decentralized, meaning they are not tied to any government or central authority, and are not subject to government manipulation. Additionally, both bitcoin and gold have a limited supply, with bitcoin having a capped supply of 21 million and gold being a finite element. These similarities have led some investors to view bitcoin as a digital form of gold and a potential alternative to traditional inflation hedges.

So what makes gold and bitcoin potential inflation hedges?

Decentralization

Bitcoin is maintained by a decentralized network of computers, eliminating the need for central control and reducing the risk of monetary policies leading to inflation. The Bitcoin network adjusts the supply of new coins through a process called mining, ensuring a predictable and consistent supply of bitcoins over time. Gold on the other hand acts similar in the sense that it is mined via traditional means and no central authority controls the supply of gold, thus preventing it from failed monetary policies.

Limited supply

Bitcoin has a fixed and limited supply of 21 million coins, preventing central authorities from printing more money and causing inflation. Yes, you guessed it. Gold has a finite supply because it is a naturally occurring element that can not be manufactured.

New age gold

In times of high inflation, investors often seek to protect their wealth by investing in assets that are perceived as less susceptible to devaluation. In times past, investors often turned to gold to protect their savings, but it looks like a new sheriff is in town. Bitcoin, with its limited and decentralized nature, has become an increasingly attractive option for those looking to preserve their wealth. This coupled with the fourth industrial revolution has made bitcoin an extremely attractive option.