Inflation refers to the decline of a currency's purchasing power over time. That means the same unit of money used to buy a basket of items today would purchase fewer items in the future. Most people view inflation as a measure of the rising goods and services prices in an economy. Thus, a hedge against inflation is an asset or investment that can maintain or appreciate its value over time while protecting users against adverse price depreciation.
Many investors are constantly looking for ways to hedge against inflation based on the increasing money printing worldwide. Cryptocurrencies, especially Bitcoin, currently seem like the best option for investors to protect themselves from inflation. However, critics also say Bitcoin is a highly volatile asset that cannot hedge against inflation. The following article explores how Bitcoin can hedge against inflation.
How to Hedge Against Inflation
Although inflation is one of the critical attributes of a healthy economy, keeping your savings in cash is not always a wise decision since it loses its purchasing power over time. That is why many investors and traders usually convert their cash holdings into a store of value investments such as cryptocurrencies, stocks, bonds, and precious metals.
Assets considered a store of value hold their buying power over time, retaining or increasing in value. Such investments have three main properties including, scarcity, accessibility, and durability.
Scarcity means a limited supply of the currency, which would likely impact greater demand and push its prices higher. Accessibility means the market will value and accept the money. Durability, on the other hand, represents the assets will continue to attract significant demands over time.
Bitcoin seems to possess all the above characteristics based on its recent performance. For instance, its 21 million supply cap induces scarcity, allowing its demand and prices to go up. Bitcoin's adoption is currently gaining traction in the mainstream financial markets and other economic sectors. Many leading crypto exchanges such as Bitcoin Era have reported increasing trading volumes, and retailers adopt Bitcoin. That indicates people's confidence in Bitcoin as a store of value.
Unlike the US dollar or other fiat currencies, Bitcoin is a decentralized currency, free of government influence. That means no authority can devalue or influence its supply. Besides, Bitcoin is divisible in up to 100m satoshis, fueling growth through smaller units of accounts as the value surges.
As one economist argues, Bitcoin's decentralization and limited supply make it a better store of value than precious metals. Bitcoin is now an independent asset class that outperformed even precious metals like gold in 2020.
Bitcoin's Role as a Long Term Store of Value
While Bitcoin seems like a better hedge against inflation in the short term, economists remain skeptical about its long-term role. Experts argue Bitcoin only has eight years of quality data during low inflation in the developed economies. Besides, Bitcoin is more volatile than the traditional inflation hedges like gold.
On the other hand, Bitcoin still faces stiff competition from other virtual currencies such as Ether, which surpassed the $500 million market cap. Those are the key reasons why many investors are worried about whether Bitcoin would live up to its role as value storage in the long term. Thus, Bitcoin could not provide a better hedge against inflation if the latter induces a recession.
Bitcoin and the crypto world remain a new frontier to most people. That is why economists advise beginners to invest cautiously. It would be best to invest only small amounts of Bitcoin in avoiding huge losses if the markets take a downturn in the future. Nevertheless, Bitcoin can work as a hedge against inflation.