The rising inflation has made inflation-proof investments more popular. Agriculture has long been considered an inflation-resistant investment, particularly in developing or under-developed countries.
Although this is still under debate, advocates consider decentralized cryptocurrencies as Inflation resistant assets, especially crypto assets like Bitcoin, the most significant decentralized crypto asset in the industry. But is this true? What is Inflation, and what does it have to do with the price of Bitcoin? We’ll delve into that and more in this article.
What is Inflation?
This is an economic term used to refer to a period when prices rise over time. This could be due to a nation’s currency dropping in value. This is easily reflected in the price of goods in the country, i.e. A razor being sold for N20 in March is later being sold for over N50 to N100 in October. Unfortunately, these increases are often not associated with higher wages. Someone earning a specific salary could find that they can afford fewer goods as the state of Inflation worsens. So, what is Inflation doing to the economy, and why does it even occur?
Some economists believe that Inflation serves a purpose in the economy as it keeps people buying locally and helps to increase the domestic production of goods. However, with the emergence of the Coronavirus pandemic, inflation rates have gotten out of hand. Cryptocurrencies that are tied to real-world assets have also experienced the impact of Inflation. The price of Bitcoin and other more established decentralized currencies have also faced fluctuations, causing many to wonder if it’s due to the state of Inflation in the economy or just a reflection of the market’s volatility.
Inflation and Bitcoin
Many people have painted Bitcoin as inflation-proof, but that might not be completely accurate. According to Cointelegraph, recent developments have shown that Bitcoin performs less as a pure hedge against Inflation. Although the economics around the inflationary nature of Bitcoin is complex, it’s still valid or fair to say that specific decentralized cryptocurrencies like Bitcoin are designed to resist Inflation or experience low inflation rates.
Are cryptocurrencies affected by Inflation?
Yes, all cryptocurrencies experience Inflation, and that includes Bitcoin. It doesn’t matter if the currency is centralized or decentralized. Like gold, Bitcoin experiences inflation as more of it is mined. Luckily, the mining of Bitcoin is automatically reduced by 50% every four years, which would result in lower inflation rates. The 50% reduction is due to Bitcoin halving. Halving is a rule installed on the Bitcoin protocol. This rule ensures that the reward given to miners for adding new blocks to the blockchain is cut short by half every 210,000 blocks or roughly every four years. This is done to protect the value of the coin.
So how does Bitcoin help during Inflation?
Although gold has been considered the go-to for hedging against Inflation, cryptocurrencies like Bitcoin are a far better alternative.
The currency might not be inflation-proof, but it is definitely Inflation resistant.
Here are some features of Bitcoin that make it the perfect Inflation resistant tool.
It is easily transferable: Bitcoin can be bought and sold on a crypto exchange or via P2P. It is borderless, and transaction fees can easily be avoided by using ValorExchange. On our platform, you can make fast, secure borderless exchanges with zero extra costs.
It has limited supply: Bitcoin is of limited supply, making it a viable hedge against Inflation. When an asset is fixed, there is no threat of new coins causing Inflation.
It isn’t associated with any nation’s currency: No country owns all the Bitcoins in the world. This can also be said of many decentralized crypto assets because that is the nature of decentralization. Bitcoin is a decentralized entity, so it would not be too affected by the economic or political risks associated with the stock market.
Bitcoin is an inflation hedge but not completely Inflation proof. But remember, the nature of the crypto industry is volatile.
Come and learn about the ins and outs of the crypto industry by joining us on Telegram. We share free information, resources, tools, etc. and more daily.